Problem%2020-2A%20(Part%20Level%20Submission)%0A%0ALorge%20Corporation%20has%20c

ID: 2503610 • Letter: P

Question

Problem%2020-2A%20(Part%20Level%20Submission)%0A%0ALorge%20Corporation%20has%20collected%20the%20following%20information%20after%20its%20first%20year%20of%20sales.%20Sales%20were%20%242%2C318%2C400%20on%20144%2C900%20units%3B%20selling%20expenses%20%24347%2C760%20(40%25%20variable%20and%2060%25%20fixed)%3B%20direct%20materials%20%24740%2C439%3B%20direct%20labor%20%24412%2C965%3B%20administrative%20expenses%20%24405%2C720%20(20%25%20variable%20and%2080%25%20fixed)%3B%20manufacturing%20overhead%20%24521%2C640%20(70%25%20variable%20and%2030%25%20fixed).%20Top%20management%20has%20asked%20you%20to%20do%20a%20CVP%20analysis%20so%20that%20it%20can%20make%20plans%20for%20the%20coming%20year.%20It%20has%20projected%20that%20unit%20sales%20will%20increase%20by%2010%25%20next%20year.

Explanation / Answer

VARIABLE COST PER UNIT = [VARIABLE SELLING EXPENSES + DIRECT MATERIALS + DIRECT LABOR + VARIABLE ADMINISTRATIVE EXPENSES + VARIABLE MANUFACTURING OVERHEAD]/TOTAL NO. OF UNITS

= [347760*0.4 + 740439 + 412965 + 405720*0.2 + 521640*0.7] /144900

= 1738800/144900

=$ 12 PER UNIT

SELLING PRICE PER UNIT = 2318400/144900

= $16 PER UNIT

CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT - VARIABLE COST PER UNIT

=16 -12

=$ 4 PER UNIT

CONTRIBUTION MARGIN RATIO = CONTRIBUTION P.U./SELLING PRICE P.U. * 100

= 4/16 * 100

=25%

TOTAL FIXED COST = FIXED SELLING EXPENSES+ FIXED ADMINISTRATIVE EXPENSES + FIXED MANUFACTURING OVERHEAD

= 347760*0.6 + 405720*0.8 + 521640*0.3

= $689724

CVP ANALYSIS:-

BREAKEVEN POINT IN UNITS = FIXED COST/CONTRIBUTION P.U.

= 689724/4

=172431 UNITS

BREAKEVEN POINT IN DOLLAR SALES = FIXED COST/ CONTRIBUTION MARGIN RATIO

= 689724/0.25

=$2758896

SALES INCREASES BY 10% NEXT YEAR

NEW SALES = 2318400*1.10

= $2550240

BREAKEVEN POINT WILL REMAIN SAME.

PROFIT WOULD INCREASE BY $57960 [110124-52164]

PARYICULARS

CURRENT YEAR

NEXT YEAR

SALES

2318400

2550240

CONTRIBUTION = 25% OF SALES

579600

637560

LESS:-FIXED COST

689724

PROFIT

-110124

-52164