Problem 8-5 Various CVP Questions: Break-Even Point: Cost Structure; Target Sale
ID: 2554208 • Letter: P
Question
Problem 8-5 Various CVP Questions: Break-Even Point: Cost Structure; Target Sales (LO1-CC2,3: LO2-CC5, 6,7,10) Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $30. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling S 18.00 per skateboard, of which 60% is direct abour cost. Over the past year the company sold 51,000 skateboards, with the following operating results Sales (51,000 skateboards) Variable expenses $1,530,000 918,000 Contribution margin Fixed expenses 612,000 492,000 Net operating income $120,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards Required: 1a. Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Contribution margin Unit sales to break-even point skateboardsExplanation / Answer
1)1a)contribution margin ratio =contribution /sales
= 612000/1530000
= .40 or 40%
contribution per unit = 612000/51000=$12
BEP (units) = Fixed cost /contribution per unit
= 492000 /12
= 41000 skateboards
1b)Degree of operating leverage =contribution /net operating income
= 612000/120000
= 5.1
2)Increase in variable cost by $ 2.4 ,will decrease unit contribution margin to 12-2.4 = $ 9.6
CM ratio : 9.6/30 = .32 or 32%
BEP =492000/9.6
= 51250
3Number of skateboards : [Fixed cost+operating income last year ]/contribution per unit
=[492000+120000]/9.6
= 63750 skateboards
4)Variable cost (new) =existing variable cost+ increase in labor cost
= 18+2.4
= 20.4
**Existing variable cost =918000/51000=18
Price to achieve same contribution margin ratio as of last year = New variable cost /(1-last year CM ratio)
= 20.4 /(1-.40)
= 20.4 /.60
= $ 34 per skateboards