Problem 19-2A Lorge Corporation has collected the following information after it
ID: 2512711 • Letter: P
Question
Problem 19-2A Lorge Corporation has collected the following information after its first year of sales. Sales were $ 1,603,200 on 100,200 units; selling expenses $ 240,480 (40% variable and 60% fixed); direct materials $ 512,022 ; direct labor $ 285,570 ; administrative expenses $ 280,560 (20% variable and 80% fixed); manufacturing overhead $ 360,720 (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 $ Entry field with correct answer Contribution margin for projected year $ Entry field with incorrect answer (2) Fixed costs for current year $ Entry field with correct answer LINK TO TEXT Correct answer. Your answer is correct. Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.) Break-even point Entry field with correct answer units Break-even point $ Entry field with correct answer SHOW SOLUTION SHOW ANSWER LINK TO TEXT Correct answer. Your answer is correct. The company has a target net income of $160,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income $ Entry field with correct answer SHOW SOLUTION SHOW ANSWER LINK TO TEXT Incorrect answer. Your answer is incorrect. Try again. 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 Entry field with incorrect answer % LINK TO TEXT Incorrect answer. Your answer is incorrect. Try again. The company is considering a purchase of equipment that would reduce its direct labor costs by $100,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $399,000, 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 $250,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.) 1. Contribution margin $ Entry field with incorrect answer 2. Contribution margin ratio Entry field with incorrect answer % 3. Break-even point $
Explanation / Answer
1) Current Year Total Per Unit Sales in units 100200 Sales revenue 1603200 16.00 Variable expenses: Direct materials 512022 Direct labor 285570 Manufacturing overhead (360720*70%) 252504 Administrative expenses (280560*20%) 56112 Selling expenses (240480*40%) 96192 Total variable expenses 1202400 12.00 Contribution Margin 400800 4.00 Fixed expenses: Manufacturing overhead (360720*30%) 108216 Administrative expenses (280560*80%) 224448 Selling expenses (240480*60%) 144288 Total fixed expenses 476952 Net operating income -76152 Projected year Total Per Unit Sales in units 110220 Sales revenue 1763520 16.00 Variable expenses: Direct materials 563224 Direct labor 314127 Manufacturing overhead (360720*70%*110%) 277754 Administrative expenses (280560*20%*110%) 61723 Selling expenses (240480*40%*110%) 105811 Total variable expenses 1322640 12.00 Contribution Margin 440880 4.00 Fixed expenses: Manufacturing overhead 108216 Administrative expenses 224448 Selling expenses 144288 Total fixed expenses 476952 Net operating income -36072 1) CONTRIBUTION MARGIN: Current year 400800 Projected year 440880 2) Fixed expenses--Current year & projected year 476952 3) Break even point for 1st year: In units = fixed cost/CM per unit = 476952/4 = 119238 Units In sales dollars = Fixed cost/CM ratio = 476952/(4/16) = $ 19,07,808 4) Sales in dollars to make NI of $160000 = (160000+Fixed cost)/CM ratio) = (160000+476952)/25% = $ 25,47,808 5) Margin of safety ratio = (Sales for target income-Break even sales)/Sales for target income = (2547808-1907808)/2547808= 25.12% 6) The changes are projected in 1st year's figures, as below for the purpose of calculations: Current Year Total Per Unit Sales in units 100200 Sales revenue 1603200 16.00 Variable expenses: Direct materials 512022 Direct labor (285570-100000) 185570 Manufacturing overhead (399000*30%) 119700 Administrative expenses (280560*20%) 56112 Selling expenses (250000*90%) 225000 Total variable expenses 1098404 10.96 Contribution Margin 504796 5.04 Fixed expenses: Manufacturing overhead (399000*70*30%) 279300 Administrative expenses (280560*80%) 224448 Selling expenses (250000*10%) 25000 Total fixed expenses 528748 Net operating income -23952 CONTRIBUTION MARGIN 504796 CONTRIBUTION MARGIN RATIO = 5.04/16 = 31.50% BREAK EVEN POINT IN SALES DOLLARS = 528748/31.5%= $ 16,78,565