Problem 19-2A Lorge Corporation has collected the following information after it

Question

Problem 19-2A Lorge 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); and 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 s Contribution margin for projected year s (2) Fixed costs for current year 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 o decimal places, e.g. 2,510. Break-even point Break-even point s units The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income s of safety ratio? If the company meets its target net income number, by what percentage could its sales all before it s operating at a loss Thats, hat s tsmarg answer to 1 decimal place, e.g. 10.5.) Round Margin of safety ratio

Explanation / Answer

1) Variable cost :-

Contribution Margin = Sales - Variable Cost

= $1500000 - $1200000

= $300000

Sales Per unit = $1500000 / 100000 = $15 per unit

Variable Cost per unit = $1200000 / 100000 = $12 per unit

Contribution Per unit = $300000 / 100000 = $3 per unit

Projected year Sales in units = 100000 + (100000*10%) = 110000 units

Contribution Margin for Projected Year = Projected year sales in unit * Contribution per unit

= 110000 * $3

= $330000

2) Fixed Cost :-

3) Break Even Point in unit :-

= Fixed Cost / Contribution per unit

= $471000 / $3

= $157000

Contribution Margin in % = $3 / $15 = 20%

Break Even Point in $ = Fixed Cost / Contribution Margin in %

= $471000 / 20%

= $2355000

4) Sales in $ required for target Net Income :-

= (Net Income + Fixed Cost) / Contribution Margin in %

= ($200000 + $471000) / 20%

= $3355000

5) Margin of Sefety Ratio :-

= (Target Sales - Break even point in $) / Target Sales

= ($3355000 - $2355000) / $3355000

= $1000000 / $3355000

= 0.29806 or 29.81%

Particulars Amount($) Direct Materials 511000 Direct Labor 290000 Manufacturing Overhead ($350000*70%) 245000 Adminiatrative Expenses ($270000*20%) 54000 Selling Expenses ($250000*40%) 100000 Total Variable Cost 1200000

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