2.(10 points) Perkins Company produces and sells a single product. The company\'

Question

2.(10 points) Perkins Company produces and sells a single product. The company's income statement for the most recent month is given below: $435,000 Sales ( 5,000 units at $29 per unit) Less variable costs: Direct materials (variable) Direct labor (variable) ..75,000 Variable factory overhead.. Variable selling and other expenses. 30,000 210.000 45,000 Contribution margin 225,000 Less fixed expenses: Fixed factory overhead.100,000 Fixed selling and other expenses...8,000 185,000 Net operating income... $ 40,000 There are no beginning or ending inventories. Required a. Compute the company's break-even point in units and sales dollars. b. What would the company's monthly net operating income be if sales c. What total level of sales (in units) must the company achieve in order to d. The company has decided to automate a portion of its operations. The and total variable costs increased by 25% and total fixed factory overhead dropped by $18,000? earn a target profit of $115,000? change will reduce direct labor costs per unit by 50 percent, but it will double the costs for fixed factory overhead. Every other cost remains unchanged. Compute the new break-even point in units.

Explanation / Answer

Req a: Total contribution : 225000 Number of units 15000 Contribution per unit 15 CM ratio (Contribution/sales) 51.72% Total Fixed cost: 185,000 Break even in units: Fixed cost / Contribution margin per unit = $ 185,000/15 = 12,333 units Break even in $: Fixed cost/ Cm ratio = 185,000/51.72% = $357,695 Req b: Income statement: Sales revenue (435000+25%) 543750 Less: Total variable c ost (210000+25%) 262500 Contribution margin 281250 Less: Total fixed cost (185000-18000) 167000 Net Income earned 114250 Req C: Desired Income: $ 115,000 Desired Contribution = 115,000+185,000 = $300,000 Target sales in Units: Desired Contribution/ Contribution per unit $ 300,000 /15 = 20,000 units Req D: variable cost per unit (29-15) 14 Less: Reduced labour cost per unit (75000/15000/2) 2.5 Revised variable cost per unit 11.5 Revised Contribution margin per unit (29-11.50) 17.5 Fixed cost: Fixed factorry overheads (100,000*2) 200,000 Fixed Selling and Other expense 85000 Fixed cost: 285000 New Break even in units: Revised Fixed Cost / Revised Contribution margin per unit $ 285,000 / 17.50 = 16,286 units

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