Problem 8-7 Computing Break-Even and Margin of Safety (LO2 - CC6, 8) Draaksh Cor

Question

Problem 8-7 Computing Break-Even and Margin of Safety (LO2 - CC6, 8)

Draaksh Corporation sells premium quality wine for $55 per bottle. Its direct materials and direct labour costs are $10 and $7 respectively per bottle. It pays its direct labour employees a wage of $13 per hour. The company performed a regression analysis using the past 12 months' data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base: y $148,700+$17.00x Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $32,200 per month for sales promotions; additionally, it has decided to offer a sales commission of $3.00 per bottle to its sales personnel. Administrative expenses are expected to be $24,100 per month. Required: 1. Compute the expected total variable cost per bottle and the expected contribution margin ratio. Total variable cost Contribution margin ratio 2. Compute the annual break-even sales in units and dollars. Annual breakeven sales in units Annual breakeven sales in dollars 3. Draaksh has budgeted sales of $7.5 million for the next fiscal year. What is the company's margin of safety in dollars and as a percentage of budgeted sales? Margin of safety Budgeted sales

Explanation / Answer

1) Computation of total variable cost per bottle:

Computation of Contribution Margin (CV) Ratio:

2) Computation of total fixed cost:

Computation of Annual Break Even Sales:

a) Break Even Sales in Units : Total Fixed Cost per annum / Contribution per unit

205,000X12/25.85 = 95,164.41 Units

b) Break Even Sales in Dollars : Total Fixed Cost per annum / PV Ratio

205,000X12/47% = $5,234,043 (Approx.)

3) Computation of Margin of safety:

a) Margin of Safety in Dollars: Total Budgeted Sales in Dollars - Break Even Sales in Dollars

$7,500,000 - 5,234,043 = $2,265,957

b) Margin of Safety as % of budgeted sales: Margin of Safety / Budgeted Sales

2,265,957 / 7,500,000 = 30.21%

Amount ($) Direct Material 10 Direct Labour 7 Manufacturing Overhead 9.15 Sales Commission 3 Total Variable Cost 29.15 WN 1: Labour Cost per bottle 7 Wages Per Hour 13 Therefore, Labour Hour per bottle 7/13 = 0.5385 Manufacturing overhaed per labour hour 17 Manufacturing overhead per bottle 0.5385 X 17 = 9.15

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---