[The following information applies to the questions displayed below.] This year

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[The following information applies to the questions displayed below.]

This year Bertrand Company sold 31,000 units of its only product for $18.80 per unit. Manufacturing and selling the product required $116,000 of fixed manufacturing costs and $176,000 of fixed selling and administrative costs. Its per unit variable costs follow.

   

Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 50% and will not affect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 36,000 units. Two plans are being considered. Under plan 1, the company will keep the price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase price by 20%. This plan will decrease unit sales volume by 5%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

This year Bertrand Company sold 31,000 units of its only product for $18.80 per unit. Manufacturing and selling the product required $116,000 of fixed manufacturing costs and $176,000 of fixed selling and administrative costs. Its per unit variable costs follow.

714 points Required: 1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. Sales Variable Costs Material Direct labor Variable overhead costs Variable S&A; costs Total variable costs Contribution margin Contribution margin % Plan 1 ontribution margin ratio Choose Numerator: Choose Denominator: Contribution margin ratico Contribution marg Choose Numerator: Choose Denominator Break-even point in dollars Break-even point in dollars Plan 2 ontribution margin ratio Contribution margin ratio Break-even point in dollars

Explanation / Answer

1. Plan 1 Plan 2

Sales 18.8 22.56 (18.8 X 120%)

Less: Variable cost:

Material ( 3.6 X 50%) (1.8) (1.8)

Direct labour ( 2.6 X 50%) (1.3) (1.3)

Variable overhead costs (0.36) (0.36)

Variable selling and administration costs (0.16) (0.16)

Contribution margin 15.18 18.94

Plan 1

Contribution margin ratio = Contribution per unit / sales price per unit

= 15.18 / 18.8 = 80.74%

Break even point in dollars = Fixed cost / Contribution margin ratio

= 116000 + 176000 / 80.74%

= 361655

Plan 2

Contribution margin ratio = 18.94 / 22.56 = 83.95 %

Break even point in dollars = 292000 / 83.95%

= 347826

2) Plan 1   Plan 2

Number of units 31000 29450

Sales 582800 (31000 X 18.8) 664392 ( 29450 X 22.56)

Variable costs 112220 ( 3.62 X 31000) 106609 ( 3.62 X 29450)

Contribution margin 470580 557783

Less: Fixed cost ( 292000) (292000)

Income before taxes 178580 265783

Income taxes (40%) (71432) (106313)

Net income 107148 159470

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