Must show work Maxwell Company manufactures and sells a single product. Price an
ID: 2536708 • Letter: M
Question
Must show work
Maxwell Company manufactures and sells a single product. Price and cost data regarding Maxwell's product and operations for fiscal year 2016 are as follows (presented under absorption or full costing) Revenue (120,000 units) Less: Cost of sales S3,000,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $1,320,000 600,000 300,000 192,000 2,412,000 Gross margin Less: Variable selling expenses S588,000 $156,000 Fixed selling and administrative expenses 276,000 432,000 Net income S156,000 Required a. Compute the number of units required to be produced and sold in order to earn direc?t costing profits of $260,000 in 2017; you may assume that in 2017, fixed costs, as well as per unit variable cost and (per unit) selling prices are the same as for fiscal year 2016 (12.5 points)Explanation / Answer
Solution a:
Variable manufacturing cost per unit = ($1,320,000 + $600,000 + $300,000) / 120000 = $18.50 per unit
Selling price per unit for 2016 = $3,000,000 / $120,000 = $25 per unit
Target direct costing profit for 2017 = $260,000
Direct costing profit = Sales - Cost of goods sold
Let number of units are x to make target direct costing profit of $260,000
Therefore
$260,000 = $25X - $18.50 X - $192,000
X = 69538 units
Therefore number of units to be produced and sold to earn direct costing profit of $260,000 = 69538 units
Solution b:
If direct labor cost increase by 8% in 2017, then revised variable cost per unit = ($1,320,000 / 120000) + ($600,000 / 120000) * 108% + $300,000 / 120000 + $156,000 / 120000
= $20.20 per unit
Contribution margin per unit for 2017 = $25 - $20.20 = $4.80
Total fixed cost for 2017 = $192,000 + $276,000 = $468,000
Breakeven point for 2017 = Fixed cost / Contribution per unit = $468,000 / 4.80 = 97500 units.
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