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 $60 per bottle. Its direct materials and direct labour costs are $11 and $8 respectively per bottle. It pays its direct labour employees a wage of $14 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 $149,200+$17.50x 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 $32,400 per month for sales promotions; additionally, it has decided to offer a sales commission of $3.25 per bottle to its sales personnel. Administrative expenses are expected to be $24,200 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

Explanation / Answer

Requirement 1 Selling Price per Bottle 60.00 Less: Variable Costs per bottle Direct Materials           11.00 Direct Labour Costs             8.00 Manufacturing overhead costs           17.50 Sales Commision             3.25 Total Variable costs 39.75 Contribution Margin 20.25 Contribution Margin ratio = Contribution margin/Sales *100                                                                  = 20.25/60 X100                                                                 = 33.75% Requirement 2 Fixed Costs Manufacturing overhead cost     1,49,200 Sales Promotions         32,400 Administrative Expenses         24,200 Total Fixed costs     2,05,800 Annual Fixed costs 24,69,600 Annual Break even in unit sales = Fixed costs/ contribution per unit                                                                 = 2,469,600/20.25                                                                  = 121,956 units Annual Break even in dollar sales = Break even units * selling price per unit                                                                 = 121,956 units X $60                                                                 = $7,317,360 Requirement 3 margin of safety in dollar             = Budgeted sales - Break even sales                                                                 = $7,500,000 -7,317,360                                                                 = $182,640 margin of safety percentage Margin of safety/ Budgeted Sales *100 = $182,640/7,500,000 X 100                                                                 = 2.44%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---