-Direct laborers are paid $18 an hour and each unit of finished goods requires 0

Question

-Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred

-The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

-The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred

-Dividends of $15,000 are to be declared and paid in each quarter

1) Assuming all G & A expenses are cut by 50%, Sales comm are cut to 5 %,and the COGS variable costs are reduced by 20% what will the new breakeven be in units?
2) Assuming the facts in 1 above how many units must be sold to earn a profit of $50,000.

3) Assuming the facts in 2. what is the margin of safety?
4) Assuming the facts in 2. what is the operating leverage?

sales $2,100,000 75,000 units at $32 per unit Cost of Goods Sold $1,428,000 at current sales level includes $1.50 per unit in fixed mfg overhead Gross Profit $672,000 Sales and Commissions $210,000 10% of sales General and Admin $200,000 half of general and admin expense is fixed, the other is variable Operating Income $262,000

Explanation / Answer

1) Total Per unit Desired changes Contribution Fixed cost sales 2100000 28 29.40 29.4 COGS-Fc 112500 112500.00 112500 COGS-Vc 1315500 17.54 14.03 -14.03 Sales commi 2.80 1.40 -1.4 G&A fixed 100000 50000.00 50000 G&A varia 100000 1.33 0.67 -0.67 Total 13.3 162500 BEP (units) = $162500 / 13.3 = 12218 units 2) Units to be sold for profit of 50000 = (162500+50000)/13.3=15977.44 units 3)Margin of Safety = Sales - Break even sales = (75000*29.4)- (12218*29.4) = $1845791 4) Operating leverage = Contribution / Operating income = 75000*13.3 / [ (75000*13.3)- 162500] =997500/835000 = 1.19

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