Buttermilk Bakery has provided the following cost data for the last year when 10

Question

Buttermilk Bakery has provided the following cost data for the last year when 100,000 loaves of bread were produced and sold. 7. Raw materials Direct labor Manufacturing overhead Selling and administrative costs $225,000 75,000 200,000 150,000 All costs are variable except for $125,000 overhead and $75,000 selling and administrative. The sales price was $10 per loaf. Required: a. How many units must be sold to meet a target operating income of $405,000? If Buttermilk desires a target operating income of $150,000, what is the amount of sales dollars needed to reach this target? What would be the operating income from producing 90,000 loaves? b. C.

Explanation / Answer

a.

Units to be sold to meet the target operating income = (Fixed cost + target profit) / Contribution margin per unit
  = ($125,000 + $75,000 + $405,000) / $5.5 = 110,000 loaves

b. Contribution margin ratio = Contribution margin / Sales = $5.5 / $10 = 0.55

Sales needed to reach target operating income = (Fixed cost + target profit) / Contribution margin ratio
  = ($125,000 + $75,000 + $150,000) / 0.55 = $636,364

c. Operating income = (90,000 x $10) – (90,000 x $4.50) - $200,000 = $295,000

Selling Price $10 Less: Variable costs: Raw materials $225,000   Direct labor 75,000 Manufacturing overhead (200,000 - 125,000) 75,000   Selling and administrative costs (150,000 - 75,000) 75,000 Total 450,000 Per unit cost 100,000 $4.5 Contribution margin $5.5

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