Parkins Company produces and sells a single product. The company\'s income state
ID: 2356725 • Letter: P
Question
Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below: Sales (6,000 units at $40 per unit) $240,000 Less manufacturing costs: Direct materials $48,000 Direct labor (variable) 60,000 Variable factory overhead 12,000 Fixed factory overhead 30,000 150,000 Gross margin 90,000 Less selling and other expenses: Variable selling and other expenses 24,000 Fixed selling and other expenses 42,000 66,000 Net operating income $ 24,000 There are no beginning or ending inventories. Required: a. Compute the company's monthly break-even point in units of product. b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses? c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month? d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in unitsExplanation / Answer
a)The company's income statement in contribution format would be:
Sales .......................................................... $240,000
Variable expenses:
DiI'ect materials .............................. $48,000
Direct labor ................................... . 60,000
Variable factor overhead...................... 12,000
Variable selling and other expenses......... 24,000.......144,000
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Contribution margin........................................... 96,000
Fixed expenses:
Fixed factory overhead ....................... 30,000
Fixed selling and other expense ....... ..... 42,000........ 72,000
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Net operating income......................................... $ 24,000
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The break-even point in units = $72,000/ $16 per unit =4500 units
b)b. 6,000 units x 125% = 7,500 units
Sales (7,500 units x $40 per unit)........................ $300,000
Variable expenses (7,500 units x $24 pel' unit)........... 180,000
Contribution margin..........................................120,000
Fixed expenses ............................................... 72.000
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Net operating income .........................................$48,000
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c)Dollar sales to earn 50,000/month = ($72,000/ $50,000) /0.4 =$305,000
d. Direct labor costs are presently $10 per unit ($60,000 7 6,000 units) and will decrease by $4 per unit ($10 x 40%). Therefore, the company's new cost structure will be:
Selling price ......................................$40 100%
Variable expenses ($24 - $4) .................. 20 50%
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Contriibution margin............................ $20...50%
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new break even point =((2 x $30,000) + $42,000) / $20 per unit = 5,100 units