Problem 6-2A (Part Level Submission) Lorge Corporation has collected the followi
ID: 2405557 • Letter: P
Question
Problem 6-2A (Part Level Submission)
Lorge Corporation has collected the following information after its first year of sales. Sales were $900,000 on 90,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $76,100; direct labor $240,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $357,000 (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.
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Problem 6-2A (Part Level Submission)
Lorge Corporation has collected the following information after its first year of sales. Sales were $900,000 on 90,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $76,100; direct labor $240,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $357,000 (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
Ans. a Step: 1 Calculation of Variable cost of the firm
Current Year Projected Year (Increase by 10%)
Selling Exp. (250000X.40) 100000 110000
Direct material 76100 83710
Direct labour 240000 264000
Admin Exp.(270000X.20) 54000 59400
Manufacturing exp. 249900 274890
Total variable cost 720000 792000
Step 2: calculation of Fixed cost
Selling exp. 150000
Admin exp. 216000
Manufacturing exp. 473100
Total Fixed cost 473100
Contribution margin Statement
Current Year Projected Year
Sales 900000 990000
Less: Variable cost 720000 792000
Contribution margin 180000 198000
Fixed cost 473100 473100
b. Calculation of Break Even points = Fixed cost/PV ratio
PV ratio = Contribution margin/Sales X100
= 180000/900000X100 = 25%
BEP in Value = 473100/.20 = 2365500
sales value per unit = 900000/90000 = 10
Break even points in units = 2365500/10 =236550
c. Target income 200000
Desired sales = (Target income+fixed cost)/PV ratio
= (200000+473100)/.20 = 3365500
d. Margin of safety =(3365500-2365500)/3365500X100=29.71%
e. Calculation of Revised Variable cost
Selling Exp .(250000X.90) 225000
Direct material 76100
Labour 130000
Admin exp 54000
Manufacturing exp (357000X.30) 107100
Total variable cost 592200
Step: 2 Calculation of Fixed cost
Selling cost = 25000
Admin exp = 216000
Manufacturing exp = 249900
Total FC = 490900
Calculation of Contribution margin
Sales = 900000
Less: VC = 592200
Contribution margin = 307800
Contribution margin % = 34.20%
Break Even point = 490900/.3420 = 1435380