Problem 6-2A Lorge Corporation has collected the following information after its
ID: 2404571 • Letter: P
Question
Problem 6-2A
Lorge Corporation has collected the following information after its first year of sales. Sales were $2,500,000 on 100,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $1,351,000; direct labor $250,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $350,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Problem 6-2A
Lorge Corporation has collected the following information after its first year of sales. Sales were $2,500,000 on 100,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $1,351,000; direct labor $250,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $350,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Explanation / Answer
Year - 1
Explanation
Question - 2
Break even point in Units and dollars for first year ( current year)
BEP in Units = Fixed cost / Contribution per Unit = 471000 / 5 = 94200 Units
BEP in Dollars = 94200 * 25 = 2355000
Question - 3
Sales required = [ ( Fixed cost + desired profit ) / CM per Unit ] * Selling price
= [ (471,000 + 160000) / 5 ] * 25 = 3,155,000
Question - 4
Margin of safety = Net Income / CM per Unit * selling price = 160000 / 5 * 25 = 800,000
Margin of safety ratio = Margin of safety / Sales * 100 = 800,000 / 3,155,000 * 100 = 25.36%
PART - 2
(3) Breake even point = Fixed cost / CM ratio = 486000 / 0.25 = $ 1,944,000
(1) Contribution margin current Year 500000 Contribution margin for projected Year 550000 (2) Fixed cost for current Year 471000