Poole Corporation has collected the following information after its first year o
ID: 2428275 • Letter: P
Question
Poole Corporation has collected the following information after its first year of sales. Net sales were $1,706,800 on 100,400 units; selling expenses $237,000 (40% variable and 60% fixed); direct materials $511,000; direct labor $280,000; administrative expenses $281,000 (20% variable and 80% fixed); manufacturing overhead $361,000 (69% variable and 31% 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.Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)
Compute the break-even point in units and sales dollars for the current year.
he company is considering a purchase of equipment that would reduce its direct labor costs by $104,700 and would change its manufacturing overhead costs to 31% variable and 69% fixed (assume total manufacturing overhead cost is $361,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $237,000, as above). Assuming that net sales remain at first-year levels, compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars.
Explanation / Answer
Compute (1) the contribution margin for the current year and the projected year
Current Year Projected Year
Sales (Units) 100,400 110,440
Sales Revenue @$17 $1,706,800 $1,877,480
Variable costs
Direct materials $511,000 $562,100
Direct labor $280,000 $308,000
Manufacturing overhead $249,090 $273,999
Administrative expenses $56,200 $61,820
Selling expenses $94,800 $104,280
Total variable costs $1,191,090 $1,310,199
Contribution Margin $515,710 $567,281
Compute fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)
Fixed costs
Manufacturing overhead $111,910
Administrative expenses $224,800
Selling expenses $142,200
Total Fixed costs $478,190
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Compute the break-even point in units and sales dollars for the current year.
Contribution Margin Ratio = $515,710 / $1,706,800 = 30.20%
BEP(dollars) = $478,190 / 30.20% = $1,583,414
BEP(units) = $1,583,411 / $17 = 93,142
Ccompute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars.
Sales (Units) 100,400
Sales Revenue @$17 $1,706,800
Variable costs
Direct materials $511,000
Direct labor $175,300
Manufacturing overhead $111,910
Administrative expenses $56,200
Selling expenses $213,300
Total variable costs $1,067,710
Contribution Margin $639,090
Contribution margin ratio = $639,090 x 100 / $1,706,800
= 37.44%
Fixed costs
Manufacturing overhead $249,090
Administrative expenses $224,800
Selling expenses $23,700
Total Fixed costs $497,590
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BEP(dollars) = $497,590 / 37.44% = $1,329,043