Problem 7-40 Basic CVP Relationships (L0 1,2,4) 3 Sales units required for Seren
ID: 2409519 • Letter: P
Question
Problem 7-40 Basic CVP Relationships (L0 1,2,4) 3 Sales units required for Serendipity Sound, Inc. manufactures and sells compact discs. Price and cost data are as follows: Selling price per unit (package of two CDs Variable costs per unit: $25.00 $6.00 larget operating income Direct material 500 140 000 un 4.50 3.00 rao. 208 1.30 Direct labor Artist's royalties 60 contihulian-margin Manufacturing overhead.. Selling expenses Total variable costs per unit $19.80 Annual fixed costs: Manufacturing overhead Selling and administrative. $ 192,000 276,000 $ 468,000 $ 3,000,000 Total fixed costs Forecasted annual sales volume (120,000 units). Required: 1. What is Serendipity Sound's break-even point in units? 2. What is the company's break-even point in sales dollars? 3. How many units would Serendipity Sound have to sell in order to earn operating income of $260,000? What is the firm's margin of safety? Management estimates that direct-labor costs will increase by 8 percent next year. How many units will the company have to sell next year to reach its break-even point? If the company's direct-labor costs do increase by 8 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio? 4. 5. 6.Explanation / Answer
Solution 1:
Contribution margin per unit = $25 - $19.80 = $5.20
Total fixed costs = $468,000
Breakeven point in units = Total fixed costs / Contribution margin per unit = $468,000 / $5.20 = 90000 units
Solution 2:
Break even point in sales dollar = Breakeven point in units * Selling price per unit = 90000 * $25 = $2,250,000
Solution 3:
Target operating incoem = $260,000
Target contribution margin = $260,000 + $468,000 = $728,000
Nos of units to be sold to earn target operating income = $728,000 / $5.20 = 140000 units
Solution 4:
Forecasted annual sales volume = $3,000,000
Breakeven sales = $2,250,000
Margin of safety sales = Current sales - Breakeven sales = $3,000,000 - $2,250,000 = $750,000
Margin of safety ratio = Margin of safety sales / current sales = $750,000 / $3,000,000 = 25%
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