Lorge Corporation has collected the following information after its first year o

Question

Lorge Corporation has collected the following information after its first year of sales. Sales were $1,500,000 on 100,000 units; selling expenses $250,000 40 variable and 60% fixed); direct mater als $511,000 direct labor $290,000 ad strative expenses $270,000 (20% variable and 80% fixed); and manuf asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year acturing overhead S350,000 70% variable and 30% foed . Top management has [X] Your answer is incorrect. Try again. Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.) (1) Contribution margin for current year Contribution margin for projected year (2) Fixed costs for current year Your answer is incorrect. Try again. Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to O decimal places, e.g. 2,510.) Break-even point units Break-even point Your answer is correct. The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income 93550 Your answer is incorrect. Try again. If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? CRound answer to I decímal place, e.g. 10.5.) Margin of safety ratio Your answer is incorrect. Try again. The company is considering a purchase of equipment that would reduce its direct labor costs by $104,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $350,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $250,000, as above). Compute (1) the contrbution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.) 483500 1. Contribution margin 2. Contribution margin ratio 3. Break-even point 30 1658703

Explanation / Answer

Total Variable cost per unit: Material (511000/100,000) 5.11 Labour (290000/100000) 2.90 manufacturing OH (350000*70%/100,000) 2.80 Admin Oh (270,000*20%/100000) 0.54 Selling OH (250,000*40%/100,000) 1.00 Total Variable cost per unit: 12.35 Selling price per unit 15.00 Contribution margin per unit 2.65 Number of units sold 100,000 Total Contribution margin earned 265,000 Revised sales units (100,000+10%) 110,000 Contribution margin earned (110,000 units @2.65) (Projected) 291500 Fixed Cost: Manufacturing OH (350000*30%) 245000 Admin OH (270000*80%) 216000 Selling OH (250,000*60%) 150000 Total Fixed Cost 611000 CM ratio (Firsts year): Contribution /Selling price *100 = 2.65 / 15 *100 = 17.67% Break even point in units: Fixed Cost / Contribution Margin per unit = 291500 /2.65 = ($ 291500 /2.65) *100 = 110,000 units Break eeven in $: Fixed Cost / CM ratio = $ 291500 /17.67% = 1650,000 Desired Profit: $ 200,000 Desired Contribution: 200,000+291500 = 491,500 Sales in $: Desired Contribution / CM ratio = 491500 /17.67% = $2782,075 Total sales: $2782075 Margin of Safety: Total sales-Break even sales = 2782075- 1650000= $1132075 Margin of safety: (1132075/2782075*100) = 40.70%

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