Vice President for Sales and Marketing Sam Totter is trying to plan for the comi
ID: 2493286 • Letter: V
Question
Vice President for Sales and Marketing Sam Totter is trying to plan for the coming year in terms of production needs to meet the sales demand. He is also trying to determine ways in which the company's profits might be increased in the coming year. Waterways markets a simple water control and timer that it mass-produces. During 2013, the company sold 696,000 units at an average selling price of per solution $4.20 per unit. The variable expenses were $1,900,080, and the fixed expenses were $683,256. What is the product's contribution margin ratio? The contribution margin ratio is % What is the company's break-even point in units and in dollars for this product? Break-even point in units units Break-even point in dollars $ What is the margin of safety, both in dollars and as a ratio? Margin of safety in dollars $ Margin of safety ratio % If management wanted to increase its income from this product by 10%, how many additional units would have to be sold to reach this income level? Waterways would have to sell an additional units If sales increase by 51,000 units and the cost behaviors do not change, how much will income increase on this product? Income will increase by $ Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company? Contribution margin ratio by % Net income by $ If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company? Contribution margin ratio by % Profit by $Explanation / Answer
Given data,
Goods Sold = 696000 units
Average Selling Price = $4.20 per unit
Sales = 696000 * 4.2 = $2923200
Variable Expenses = $1900080
Fixed Expenses = $683256
Contribution Margin = Sales – Variable Expenses
= $2923200 - $1900080
= $1023120
Contribution Margin Ratio = Contribution Margin / Sales * 100
= 1023120 / 2923200 * 100
= 35%
Break Even Point:
Contribution Margin per unit = Contribution Margin / Units
= 1023120 / 696000
= $1.47
Break Even Point in units
= Fixed Expenses / Contribution per unit
= 683256 / 1.47
= 464800 units
Break Even Point in dollars
= Fixed Expenses / Contribution Margin Ratio
= 683256 / 35%
= $1952160
Margin of Safety in dollars
= Sales – Break Even Point in dollars
= $2923200 - $1952160
= $971040
Margin of Safety in units
= Units Sold – Break Even Point in units
= 696000 – 464800
= 231200 units
Present Income
= Contribution Margin – Fixed Expenses
= $1023120 - $683256
= $339864
Income to be increased by 10%
Targeted Income = $339864 + 10% (339864)
= $373850.4
Particulars
Amount ($)
Sales
3020304
Less: Variable Expenses (65%)
1963197.6
Contribution Margin (35%)
1057106.4
Lees: Fixed Expenses
683256
Income
373850.4
Number of units to be sold = Sales/ SP = 3020304 / 4.2 = 719120 units
Additional units to be sold = 719120 – 696000 = 23120 units
Particulars
Amount ($)
Sales
3020304
Less: Variable Expenses (65%)
1963197.6
Contribution Margin (35%)
1057106.4
Lees: Fixed Expenses
683256
Income
373850.4
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