Problem 8-7 Computing Break-Even and Margin of Safety (LO2 - CC6, 8) Draaksh Cor
ID: 2556383 • Letter: P
Question
Problem 8-7 Computing Break-Even and Margin of Safety (LO2 - CC6, 8) Draaksh Corporation sells premium quality wine for $90 per bottle. Its direct materials and direct labour costs are $17 and $14 respectively per bottle. It pays its direct labour employees a wage of $20 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= $152,200 + $20.50x 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 $33,600 per month for sales promotions; additionally, it has decided to offer a sales commission of $4.75 per bottle to its sales personnel. Administrative expenses are expected to be $24,800 per month.Explanation / Answer
Req 1 Variable cost per unit: Material 17 labour 14 Manufacturing OH (0.7 hr @ 20.50) 14.35 sales commission 4.75 Total variable cost per unit 50.1 Selling price 90 Contribution margin per unit 39.90 Total Fixed cost: Fixed mfg OH 152200 Admin OH: 24800 Sales promotion 33600 Total Fixed cost: 210600 CM ratio: Contribution/ Selling price *100 = 39.90 / 90 *100 = 44.33% Req 2: Break even in units: Fixed cost *12 / Contribution per unit = 210,600 *12/39.90 = 63,339 units Break even in $: Fixed Cost *12/ CM ratio = 210,600 *12 /44.33% = $ 5700,500 Req 3: Actual sales: $ 7500,000 Annual Break even sales: $ 5700,500 Margin of Safety: Actual sales - Break even sales: 7500,000 -5700,500 = $ 1799,500 Budgeted sales % (1799,500 /7500,000): 24%