Mini Practice f X 22231/viewContent/21872129/Niew B&L; Landscapes, Inc. Mini Pra
ID: 2431975 • Letter: M
Question
Mini Practice f X 22231/viewContent/21872129/Niew B&L; Landscapes, Inc. Mini Practice Part 4 Bll Graham and Larry Miller incorporated B&L; Landscapes, Inc. on July 1, 2016. The business consists of lawn care and sprinkler system installations. fertilizer In addition, they also sell two types of During 2017, B&L; Landscapes, Inc. acquired a 30% interest in Crestline Pipe. The president of Crestine has been expressing concem about the profitability of the company. Bill and Larry want to help and have volunteered your services to provide some managerial reporting for Crestline Crestline Pipe distributes high-quality Inch PVC pipe that sells for $3.00 per linear foot unilt. Variable costs are $0.90 per unit, and fixed costs total 27,000 per year. Assume that the operating results for last year were: $60,000 Less variable expenses. 18000 Contribution margin42,000 Less fixed expenses..27.00 Net operating income. $ 15.000 Instructions: Answer the following independent questions: 1. What is the product's contribution margin? What is the product's CM ratio 2. Use the contribution margin to determine the break-even point in sales units (round to whole units). Use the CM ratio to determine the break even point in sales dollars (round to whole dollars) 3. What is the margin of safety In dollars and units for Crestiline Plpe? 4. Due to an Increase in demand, the company estimates that sales will Increase by $20,000 this year. By how much should net operating Income Increase (or net operating loss decrease), assuming that fixed costs do not change? 5. The president expects sales to increase by 25% mis year if sales do increase by 25% how 6. The president would like to reduce the sales price of the pipe to $2.70 per linear foot unit what is the breakeven point in costs increase and still maintain net operating income of $15,000 and increase advertising by $3,000. Using the CM method, units with these changes (round to whole units)9 How many units would Crestline have to maintaln a net operating income of at least $15,000 (round to whole units)?Explanation / Answer
1.
Selling price = $3 per unit
Variable cost = $0.90 per unit
Contribution margin = Selling price - Variable cost
= 3 - 0.90
= $2.10 per unit
Contribution margin ratio = Contribution margin/Selling price
= 2.10/3
= 70%
2.
Break even point (in units) = Fixed cost/Contribution margin per unit
= 27,000/2.10
= 12,857
Break even point (in dollars) = Fixed cost/Contribution margin ratio
= 27,000/70%
= $38,571
3.
Margin of safety ( in $) = Profit/Contribution margin ratio
= 15,000/70%
= $21,429
Margin of safety ( in units) = 21,429/3
= 7,143
4.
Variable cost ratio = 0.90/3
= 30%
Income statement
For the current year
Hence, operating income will increase by $14,000 (29,000 - 15,000)
5.
Income statement
For the current year
Hence, fixed cost will increase by $10,500 (37,500 - 27,000)
6.
New selling price per unit = $2.70
Variable cost per unit = $0.90
Contribution margin per unit = 2.70 - 0.90
= $1.80
Increase in fixed cost = $3,000
Hence, new fixed cost = 27,000 + 3,000
= $30,000
Break-even point (in units) = Fixed cost/Contribution margin per unit
= 30,000/1.80
= 16,667 units
Desired profit = $15,000
Number of units to be sold to get a desired profit = (Fixed cost + Desired profit)/Contribution margin per unit
= (30,000 + 15,000)/ 1.80
= 45,000/1.80
= 25,000
Hence, 25,000 units will have to be sold to get operating income of $15,000
Sales 80,000 Less: Variable cost (80,000 x 30%) - 24,000 Contribution margin 56,000 Less: Fixed cost - 27,000 Net operating income 29,000