A cement manufaturer has supplied the following data: Tons of cement produced &

ID: 2600579 • Letter: A

Question

A cement manufaturer has supplied the following data:

Tons of cement produced & sold 260,000

Sales revenue $1,118,000

Variable manufacturing expense 429,000

Fixed maunfacturing expense 288,000

Variable selling & admin expense 91,000

Fixed selling & admin expense 228,000

Net operating income 82,000

A) What is the company;s break even point?

B) What is the company's unit contribution marigin?

C) The company's contribution margin ratio is closest to:

D) If the company increases its unit sale volume by 3% without increasing fixed expenses, then total net operating income should be closest to:

Explanation / Answer

(A). Company’s break even point;

Formula of break even point is as follow;

Break even point in (tons) =

(Fixed costs / contribution margin per unit)

Fixed costs = ($288000 + $228000) = $516000

Variable costs ($429000 + $91000) = $520000

Contribution margin = Sales – Variable costs

($1118000 – $429000 – $91000) = $598000

Per unit contribution margin ($598000 / 260000) = $2.30 per ton

Per unit sale price ($1118000 / 260000) = $4.30 per ton

Now let’s put the values in the formula;

Break even point in (tons) = $516000 / $2.30 = 224347.83 tons

Break even point in (Dollar value) = $516000 * $4.30 / $2.30 = $964695.65 (Approx.)

(B). Company's unit contribution marigin;

Contribution margin = Sales – Variable costs

($1118000 – $429000 – $91000) = $598000

Per unit contribution margin ($598000 / 260000) = $2.30 per ton

(C). Company's contribution margin ratio is closest to;

Formual of contribution margin ratio is as follow;

Contribution margin ratio = Contribution margin * 100 / Sales

Contribution margin ratio = $598000 * 100 / $1118000

= 53.49% (Approx.)

(D). If the company increases its unit sale volume by 3% without increasing fixed expenses, then total net operating income should be closest to;

Tons of cement produced & sold (260000 + 7800)

267800

Per unit sale price

$4.3

Total sales revenue

$1151540

Variable manufacturing expense (Increased by 3%)

$441870

Fixed manufacturing expense

$288000

Variable selling & admin expense (Increased by 3%)

$93730

Fixed selling & admin expense

$228000

Net operating income

$99940