B&L; Landscapes, Inc. Mini Practice Part 4 Bill Graham and Larry Miller incorpor
ID: 2526848 • Letter: B
Question
B&L; Landscapes, Inc. Mini Practice Part 4 Bill Graham and Larry Miller incorporated B&L; Landscapes, Inc. on July 1,2014. The business consists of lawn care and sprinkler system installations. In addition, they also sell two types of fertilizer. During 2015 Bsi landscapes, Inc. acquieda30%InterestinCrestine Pipe. The president°f Crestline has been expressing concern about the profitability of the company. Bill and Larry want to help and have volunteered your services to provide some managerial reporting for Crestline Crestline Pipe distributes high-quality 3 inch PVC pipe that sells for $3.00 per linear foot unit. Variable costs are $1.05 per unit, and fixed costs total 27,000 per year. Assume that the operating results for last year were: Sa.. $60,000 Less variable expenses. _21000 Contributio Less fixed expenses. 27000 Net operating income. $ 12,000 n margin 39,000Explanation / Answer
1. Contribution margin = Unit Selling Price - Unit Variable Cost = $ 3.00 - $ 1.05 = $ 1.95.
Contribution margin ratio = Unit Contribution Margin / Unit Selling Price = $ 1.95 / $ 3.00 = 0.65 or 65 %.
2. Break-even point in sales units = Fixed Expenses / Unit Contribution Margin = $ 27,000 / $ 1.95 = 13,846 units.
Break-even point in sales dollars = Fixed Expenses / Contribution Margin Ratio = $ 27,000 / 65 % = $ 41,538.
3. Margin of Safety in dollars = Actual Sales Revenue - Break-even Sales Revenue = $ 60,000 - $ 41,538 = $ 18,462.
Margin of safety in units = Actual Sales Units - Break-even sales units = 20,000 - 13,846 = 6,154 units.
4. Increase in net operating income = Increase in Sales x Contribution Margin Ratio = $ 20,000 x 65 % = $ 13,000.
5. For net operating income to remain at $ 12,000, fixed expenses can go up to [ $ 60,000 x 125%] x 65% - $ 12,000 = $ 36,750.
Maximum increase in fixed expenses = $ 36,750 - $ 27,000 = $ 9,750.
6. Contribution margin per unit = $ 2.70 - $ 1.05 = $ 1.65.
Fixed expenses = $ 27,000 + $ 3,000 = $ 30,000.
Break-even point in units = $ 30,000 / $ 1.65 = 18,182 units.
Number of units to be sold to earn $ 12,000 = $ ( 30,000 + 12,000) / 1.65 = 25,455 units
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