Leprechaun Enterprises Inc., is considering building a manufacturing plant in Co

ID: 2497682 • Letter: L

Question

Leprechaun Enterprises Inc., is considering building a manufacturing plant in County Cork.
Predicting sales of 100,000 units, Leprechaun estimates the following expenses:

Total Percentage of Total

Annual Annual Expenses

Expenses That are Fixed

Materials................................................................................ $19,000 10%

Labor...................................................................................... 26,000 20%

Overhead............................................................................... 40,000 40%

Marketing and administration................................................ 14,000 60%

$99,000

An Irish firm that specializes in marketing will be engaged to sell the manufactured product and will receive a commission of 10% of the sales price. None of the U.S. home office expense will be allocated to the Irish facility.

Required:

1.If the unit sales price is $2, how many units must be sold to break even?
(Hint: First compute the variable cost per unit.)

2.Calculate the margin of safety ratio.

3.Calculate the contribution margin ratio.

Explanation / Answer

Variable cost per unit:

Material (19,000 × 90% =)

17,100

Labor (26,000 × 80% =)

20,800

Overhead (40,000 × 60% =)

24,000

Marketing (14,000 × 40% =)

5,600

Commission ($2 × 100,000 × 10% =)

20,000

Total variable cost (V)

87,500

Number of units (U)

100,000

Variable cost per unit (V / U)

$0.875

Contribution per unit = Sales per unit – Variable cost per unit = $2 - $0.875 = $1.125

Fixed cost = $99,000 - $67,500 = $31,500

Break-even units = Fixed cost / Contribution per unit

= $31,500 / $1.125

= 28,000

Margin of safety = Sales – Break-even sales

= ($2 × 100,000) – ($2 × 28,000)

= $200,000 - $56,000

= $144,000

Margin of safety ratio = Margin of safety / Sales

= ($144,000 / $200,000) × 100

= 72%

Contribution margin ratio = Contribution per unit / Sales per unit

= ($1.125 / $2) × 100

= 56.25%