Draaksh Corporation sells premium quality wine for $80 per bottle. Its direct ma

Question

Draaksh Corporation sells premium quality wine for $80 per bottle. Its direct materials and direct labour costs are $15 and $12 respectively per bottle. It pays its direct labour employees a wage of $18 per hour The company performed a regression analysis using the past 12 months' data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base: y $151,200+$19.50x Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $33,200 per month for sales promotions; additionally, it has decided to offer a sales commission of $4.25 per bottle to its sales personnel. Administrative expenses are expected to be $24,600 per month. Required: 1. Compute the expected total variable cost per bottle and the expected contribution margin ratio. Total variable cost Contribution margin ratio 2. Compute the annual break-even sales in units and dollars Annual breakeven sales in units Annual breakeven sales in dollars 3. Draaksh has budgeted sales of $7.5 million for the next fiscal year. What is the company's margin of safety in dollars and as a percentage of budgeted sales? Margin of safety Budgeted sales

Explanation / Answer

Answer 1. Direct Materials                  15.00 Direct Labor                  12.00 Sales Commision                     4.25 Variable Cost per Bottle                  31.25 Contribution Margin Ratio = Contribution / Sales Selling Price Per Bottle                  80.00 Variable Cost per Bottle                  31.25 Contribution margin Per Bottle                  48.75 Contribution Margin ratio 60.94% Answer 2. BEP (in Units) = Fixed Costs / Contribution margin per Unit Fixed Manufacturing Cost - $151,200 X 12    1,814,400.00 Sales Promotions - $33,200 X 12        398,400.00 Administrative Expenses - $24,600 X 12        295,200.00 Total Fixed Costs    2,508,000.00 BEP (in Units) = $2,508,000 / $48.75 BEP (in Units) = 51,446.15 or say 51,446 bottles (approx.) BEP (in $) = BEP (In Units) X SP per Bootle BEP (in $) = 51,446 bottles X $80 BEP (in $) = $4,115,680 Answer 3. Margin of safety = Sales - BEP (In $) Margin of safety = $7,500,000 - $4,115,680 Margin of safety = $3,384,320 Margin of Safety in % = $3,384,320 / $7,500,000 Margin of Safety in % = 45.12% (approx.)

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