2. Native American Pottery expects to earn a profit of $95,000 in 20xx. The comp

Question

2. Native American Pottery expects to earn a profit of $95,000 in 20xx. The company manufactures ornamental ceramic tiles. Each lot of 100 blocks requires variable costs of $5.00 for direct materials, $3.50 for direct labor, and $4.50 for overhead. Total variable costs are thus $13 per lot. Fixed costs for 20xx are expected to be $130,000. Each hundred-block lot will sell for $33. (20 Points)

a. Determine how many lots of ceramic tiles the company must sell to earn its targeted profit, and convert this amount to sales dollars.

b. Compute breakeven sales in dollars.

c. Explain the dollar difference between breakeven sales dollars and the sales dollars necessary to earn the targeted profit. Use the contribution margin as part of your explanation.

Explanation / Answer

Answer:

a.

Number of lots of ceramic tiles the company must sell to earn its targeted profit = (Fixed Costs + Targeted Profit) / Contribution Per lot

= ($130,000 + $95,000) / $20 = 11,250 lots

Contribution Per Lot = Sell Price – Variable Cost per lot = $33 - $13 = $20

Sales dollars to earn targeted profit = 11,250 lots x Sell Price per lot = 11,250 x $33 = $371,250

b.

Break-Even Sales in dollars = Fixed Cost / Contribution Margin Ratio = $130,000 / 60.6060% = $214,500

Contribution Margin Ratio = Contribution margin / Sell Price x 100 = $20 / $33 x 100 = 60.6060%

C.

Break Even Sales dollar = $214,500

Sales dollars necessary to earn the targeted profit = $371,250

Difference between Sales dollars necessary to earn the targeted profit and Break Even Sales dollar = $156,750

Break-even point is the point of sales at which fixed costs are recovered. Above break even points all the contribution margin earns by the company is their profit.

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