4-44 Cost-Volume-Profit Equation, Basic Concepts, Solving for Unk Company produc

Question

4-44 Cost-Volume-Profit Equation, Basic Concepts, Solving for Unk Company produces hand cream in plastic jars. Each jar sells for $3.40. 1 ach jar (materials, labor, and overhead) totals $2.55. The total fixed cost e most recent year, 81,600 jars were sold. tis the break-even point in units for Legrand? What is the margin of safety ost recent year? are an income statement for Legrand's most recent year many units must be sold for Legrand to earn a profit of $25,500? t is the level of sales dollars needed for Legrand to earn operating inconm ?? 231

Explanation / Answer

Solution: a. Breakeven point in units =68,400 units Margin of safety in units = 13,200 units Working Notes: Breakeven point in units = Total fixed cost / Contribution margin per unit Contribution margin per unit = Selling price per unit - Variable cost per unit =$3.40 - $2.55 =0.85 per unit Breakeven point in units = Total fixed cost / Contribution margin per unit =$58,140/0.85 =68,400 units Margin of safety in units =total current sales unit - Break even point in units =81,600 - 68,400 =13,200 units b. Legrand's Income Statement Revenue 277,440 Less: Variable costs 208,080 Contribution margin 69,360 Less: Fixed costs 58,140 Operating Income 11,220 Working Notes: Legrand's Income Statement Revenue   (a) 277,440 [81,600 X $3.40 ] Less: Variable costs (b) 208,080 [81,600 X $2.55 ] Contribution margin           (a-b) 69,360 Less: Fixed costs 58,140 Operating Income 11,220 c. Units must be sold for Legrand to earn a profit of $25,500 = 98,400 units Working Notes: Units to be sold= ( Fixed costs + Desired profit) / Contribution Margin per unit = ( 58,140 + 25,500)/ $0.85 =98,400 units Contribution Margin per unit = $0.85 is used from our above calculation d. The level of sales dollars needed = $387,600 Working Notes: The level of sales dollars needed for Legrand to earn operating income of 10% of sales can be calculated by using this formula Operating Income = Sales - (Variable Cost Ratio x Sales) - Total Fixed Expense Where , Operating income = 10% x sales Variable cost ratio = Variable cost per unit/Selling price per unit =$2.55/$3.40 =0.75 Total Fixed Expense= $58,140 Operating Income = Sales - (Variable Cost Ratio x Sales) - Total Fixed Expense 10% x sales = sales - (0.75 x sales ) - $58,140 10% x sales = 0.25 sales - $58,140 0.25 sales - 0.10 sales = $58,140 0.15 sales =$58,140 sales=$58,140/0.15 Sales=$387,600 Please feel free to ask if anything about above solution in comment section of the question.

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