Cost Volume Profit Farrell Company manufactures a product that sells for $50 per
ID: 2388517 • Letter: C
Question
Cost Volume ProfitFarrell Company manufactures a product that sells for $50 per unit. Farrell incurs a variable cost per unit of $30 and $3,400,000 in total fixed costs to produce this product. They are currently selling 200,000 units.
Instructions: Complete each of the following requirements, presenting labeled supporting computations.
(A) Compute and label the contribution margin per unit and contribution margin ratio.
(B) Using the contribution margin per unit, compute the break-even point in units.
(C) Using the contribution margin ratio, compute the break-even point in dollars.
(D) Compute the margin of safety and margin of safety ratio.
(E) Compute the number of units that must be sold in order to generate net income of $400,000 using the contribution margin per unit.
(F) Should Farrell give commission to its salesmen based on 10% of sales, if it will decrease fixed costs by $400,000 and increase sales volume 10%? Support your answer with labeled computations.
NOTE: I KNOW it's a LOT! Will rate LIFESAVER!
Explanation / Answer
Farrell Company manufactures a product that sells for $50 per unit
Variable Cost per unit = $30
Total Fixed Cost = $3,400,000
Number of selling units = 200,000 units
Selling price per unit = $50 per unit
(A) Compute and label the contribution margin per unit and contribution margin ratio:
Contribution Margin per unit = [Selling price per unit – Variable Cost per unit]
Contribution Margin per unit = [$50 - $30]
Contribution Margin per unit = $20
(B) Using the contribution margin per unit, compute the break-even point in units:
Break-even point in units = [Total Fixed Cost / Unit Contribution]
Break-even point in units = [$3,400,000 / $20]
Break-even point in units = 170,000 units
(C) Using the contribution margin ratio, compute the break-even point in dollars:
Break-even point in dollars = [Total Fixed Cost / Contribution margin ratio]
Contribution Margin Ratio = [(Sales – Variable Cost) / Sales]
Contribution Margin Ratio = [($50 - $30) / $50]
Contribution Margin Ratio = 0.40 (Or) 40%
Break-even point in dollars = [$3,400,000 / 0.40]
Break-even point in dollars = $8,500,000
(D) Compute the Margin of Safety and Margin of Safety Ratio:
Margin of Safety = [Total budgeted or actual sales – Break even sales]
Total budgeted or actual sales = [200,000 units * $50 per unit]
Total budgeted or actual sales = $10,000,000
Break-even Sales = $8,500,000
Margin of Safety = [$10,000,000 - $8,500,000]
Margin of Safety = $1,500,000
Margin of Safety Ratio = [Margin of Safety in dollars / Total budgeted or
actual sales]
Margin of Safety Ratio = [$1,500,000 / $10,000,000]
Margin of Safety Ratio = 0.15 (or) 15%
(E) Compute the number of units that must be sold in order to generate net income of $400,000 using the contribution margin per unit:
Number of required units = [($3,400,000 + $400,000) / $20]
Number of required units = 190,000 units