Problem 18-5A Mozena Corporation has collected the following information after i
ID: 2477114 • Letter: P
Question
Problem 18-5A Mozena Corporation has collected the following information after its first year of sales. Sales were $1,500,000 on 100,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $511,000; direct labor $290,000; administrative expenses $270,000 (20% variable and 80% fixed); manufacturing overhead $350,000 (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. 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.) (1) Contribution margin for current year $ Contribution margin for projected year $ (2) Fixed Costs $ Compute the break-even point in units and sales dollars for the current year. (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answers to 0 decimal places, e.g. 1,225.) Break-even point in units units Break-even point in dollars $ The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target? (Round answer to 0 decimal places, e.g. 1,225.) Sales dollars required for target net income $ If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5%.) Margin of safety ratio %
Explanation / Answer
The contribution margin is sales revenue minus all variable costs. And the formula is to calculate contribution margin ratio is
Contribution margin ratio = contribution margin / sales
Now we will calculate the contribution margin of Mozena Corporation
Current year
Projected year
sales units
Amount($)
Price per unit ($)
sales units
Amount($)
Price per unit ($)
sales revenue
100,000
1,500,000
15.00
110,000
1,650,000
15.00
Variable cost
direct material
100,000
511000
5.11
110,000
562,100
5.11
direct labor
100,000
290000
2.90
110,000
319,000
2.90
selling expenses
100,000
100000
1.00
110,000
110,000
1.00
manufacturing overhead
100,000
245000
2.45
110,000
269,500
2.45
administrative expenses
100,000
54000
0.54
110,000
59,400
0.54
total variable cost
1200000
12.00
1320000
12.00
Contribution margin
300,000
3.00
330,000
3.00
Fixed expenses
selling expenses
150000
150000
manufacturing overhead
105000
105000
administrative expenses
216000
216000
Total fixed cost
471000
471000
1 ) the contribution margin in current year is $ 300,000 and in projected year is $ 330,000
the fixed cost is $471,000 in current and projected year
the break even point in units are calculated by using the formula
break even sales unit = total fixed cost / contribution per unit
where
fixed cost = $471,000
contribution per unit = $3
break even sales in units = 471000/3
break even sales in units= 157,000
The break even sales in $ = break even sales in units x sales per per unit
The break even sales in $ = 157000 x 15
The break even sales in $= $ 2,355,000
to calculate the required sales if target income is $200,000
Target Income Sales in Dollars = Revenue per Unit × Target Income Sales in Units
To calculate Target income sales in units = (fixed cost + target income) / contribution margin per unit
Putting values for calculating
Target income sales in units = (471000 + 200000) / 3
Target income sales in units = 671000 / 3 = 223666.66
Putting values for calculating
Target Income Sales in Dollars = 15 x 223666.66
Target Income Sales in Dollars = $3,355,000
To calculate the margin of safety the formula is Actual or budgeted sales – Sales required to break-even
The margin of safety percentage is calculated by (MOS/Actual or budgeted sales) × 100
Putting values to calculate margin of safety
MOS = 3355000-2355000
MOS = 20,00,000
Margin of safety ratio in percentage is
= (20,00,000 / 33,55,000) x 100
= 59.6 %
The margin of safety is 59.6 %
Current year
Projected year
sales units
Amount($)
Price per unit ($)
sales units
Amount($)
Price per unit ($)
sales revenue
100,000
1,500,000
15.00
110,000
1,650,000
15.00
Variable cost
direct material
100,000
511000
5.11
110,000
562,100
5.11
direct labor
100,000
290000
2.90
110,000
319,000
2.90
selling expenses
100,000
100000
1.00
110,000
110,000
1.00
manufacturing overhead
100,000
245000
2.45
110,000
269,500
2.45
administrative expenses
100,000
54000
0.54
110,000
59,400
0.54
total variable cost
1200000
12.00
1320000
12.00
Contribution margin
300,000
3.00
330,000
3.00
Fixed expenses
selling expenses
150000
150000
manufacturing overhead
105000
105000
administrative expenses
216000
216000
Total fixed cost
471000
471000