In the year 2013, Wiggins Processing Company had the following contribution inco
ID: 2465743 • Letter: I
Question
In the year 2013, Wiggins Processing Company had the following contribution income statement:
(a) Determine the annual break-even point in sales dollars.
Incorrect
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(b) Determine the annual margin of safety in sales dollars.
Incorrect
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(c) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $57,000?
Incorrect
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(d) With the current cost structure, including fixed costs of $285,000, what dollar sales volume is required to provide an after-tax net income of $200,000?
Incorrect
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(e) Prepare an abbreviated contribution income statement to verify that the solution to part (d) will provide the desired after-tax income.
Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers.
Incorrect
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Contribution Income Statement
For the Year 2013 Sales $ 1,200,000 Variable costs Cost of goods sold $ 420,000 Selling and administrative 200,000 (620,000) Contribution margin 580,000 Fixed Costs Factory overheard 205,000 Selling and administrative 80,000 (285,000) Before-tax profit 295,000 Income taxes (36%) (106,200) After-tax profit $ 188,800
Explanation / Answer
Answer:
Contribution Margin Ratio = $ 580,000 / $ 1,200,000 = 48.33%
a. Annual Breakeven Point Sales = Total Fixed Cost / Contribution Margin Ratio = $ 285,000 / 48.33% = $ 589,695.84
b. Margin of Safety = Current Sales Level - Breakeven Sales / Current Sales Level = 50.86% or $ 610,304.16
c. Annual Breakeven Point Sales if fixed costs increased by $ 57,000 = Total Fixed Cost / Contribution Margin Ratio = $ 285,000 + 57,000 / 48.33% = $ 707,635.01
d. After tax income of $ 200,000 means before tax income of $ 312,500 that is Contribution = $ 312,500 + $ 285,000 = $ 597,500 and Required Sales Volume = $ 597,500 x 100 /48.33 = $ 1,236,292.16
e. Sales = $ 1,236,292.16
Variable Cost (51.67% of Sales) = $ 638,792.16
Contribution = $ 597,500