ACCOUNTING 220 TAKE HOME ASSIGNMENT #1 220 001 4. (19 marks) Uclulet Corporation

Question

ACCOUNTING 220 TAKE HOME ASSIGNMENT #1 220 001 4. (19 marks) Uclulet Corporation manufactures kayaks. It currently manufactures 1,000 kayaks per year which it sells to retailers for $480 per kayak. It incurs variable costs of $180 per kayak and fixed costs of $220,000. It is considering automating the manufacturing process which is now largely manual. It estimates that if it does so, its fixed costs will be $280,000 and its variable costs will decline to $120 per kayak. Instructions Calculate the contribution margin ratio, the break-even point in dollars, the margin of safety ratio and the degree of operating leverage based on the current activity. (8 marks) Calculate the contribution margin ratio, the break-even point in dollars, the margin of safety ratio and the degree of operating leverage based on the proposed changes (assuming sales remain the same). (8 marks) a) b) c) Discuss the implications of adopting the changes based on the above itf i. Sales remain the same ii. Sales increase (3 marks)

Explanation / Answer

a)

Contribution margin ratio = (Sales - Variable expenses) ÷ Sales

=[(1000*480 - 1000*180)/ 1000*480]*100 = (300000/480000)*100 =62.50%

Break even point in unit = Fixed cost/ contribution margin per unit

= 220000/(480-180) = 733 units

Break even point in Dollars = Sales price per unit * Break even point in unit

= 480*733 = $351840

Margin of safety = Total sales – Break even sales in dollars = 480000 - 351840= $128160

Margin of safety percentage (Margin of safety ratio) = Margin of safety in dollars / Total sales

=$128160 /$480000 = 26.70%

=(480000-180000) / (480000-180000-220000) = 3.75

b)

Contribution margin ratio = (Sales - Variable expenses) ÷ Sales

=[(1000*480 - 1000*120)/ 1000*480]*100 = (360000/480000)*100 =75%

Break even point in unit = Fixed cost/ contribution margin per unit

= 280000/(480-120) = 778 units aproximately

Break even point in Dollars = Sales price per unit * Break even point in unit

= 480*778 = $373440

Margin of safety = Total sales – Break even sales in dollars = 480000 - 373440= $106560

Margin of safety percentage (Margin of safety ratio) = Margin of safety in dollars / Total sales

=$106560 /$480000 = 22.20%

= (480000-120000) / (480000-120000-280000) = 4.5

  

c)

i) If sales remain the same, then Margin of safety ratio wil decrease from 26.70 to 22.20 . Therefore we should not adopt this change

ii) If sales increases, then we should adopt the change as variable cost per unit is only $120 which will increase the contribution per unit and it will also recover the increased amount of fixed cost.

Degree of operating leverage = (sales variable costs)/ (sales variable costs fixed costs)

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