2. (BEP, CVP before and after tax) Equalizer Corporation makes and sells jar lid
ID: 2593250 • Letter: 2
Question
2. (BEP, CVP before and after tax) Equalizer Corporation makes and sells jar lid openers. Cost information for one unit is as follows:
Direct material $1.00
Direct labor .50
Variable factory overhead .25
Variable selling expenses .05
Total variable costs $1.80
Total Fixed cost $194,400
Each lid opener sells for $4.50. Current annual production and sales volume is 150,000 lid openers. A pre-determined fixed factory overhead rate can be computed based on this activity level.
Required:
a. Compute the unit contribution margin and contribution margin ratio for Equalizer Corporation's product.
b. Compute the breakeven point in units for Equalizer Corporation, using contribution margin.
c. Compute the breakeven point in sales dollars for Equalizer Corporation, using contribution margin ratio.
d. If Equalizer Corporation wants to earn $43,200 of before-tax profits, how many openers will it have to sell?
e. If Equalizer Corporation wants to earn $40,500 after taxes and is subject to a 25 percent tax rate, how many units will it have to sell?
f. If Equalizer Corporation can sell an additional 12,000 openers overseas for $3.50. Variable costs will increase by $0.20 for shipping expenses, and fixed costs will increase by $25,000 because of the purchase of a new machine. This is a one-time only sale and will not affect domestic sales this year on in the future. Should Equalizer Corporation sell additional units?
Explanation / Answer
a.
Unit contribution margin = Selling price - Variable costs
= 4.5 - 1.8
= 2.7
Contribution margin ratio = Unit contribution margin / Selling price
= 2.7 / 4.5
= 60%
b.
Breakeven point in units = Fixed costs / Contribution margin per unit
= 194,400 / 2.7
= 72,000 units
c.
Breakeven point in sales dollars = Fixed costs / Contribution margin ratio
= 194,400 / 60%
= 324,000
d.
Number of units = (Fixed costs + Desired profit) / Contribution margin per unit
= (194,400 + 43,200) / 2.7
= 88,000 units
e.
40,500 profit after taxes = 54,000 profit before taxes (40,500/75%)
Number of units = (Fixed costs + Desired profit) / Contribution margin per unit
= (194,400 + 54,000) / 2.7
= 92,000 units
f.
Relavent costs = Variable costs + Additional fixed costs
= (1 + 0.5 + 0.25 + 0.25) * 12,000 + 25,000
= 49,000
Sales = 12,000 * 3.5 = 42,000
Financial disadvantage = Sales - Relavent costs
= 42,000 - 49,000
= 7,000
Should Equalizer Corporation sell additional units? - NO (as there is financial disadvantage)
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