Problem 19-2A Lorge Corporation has collected the following information after it
ID: 2571877 • Letter: P
Question
Problem 19-2A
Lorge Corporation has collected the following information after its first year of sales. Sales were $900,000 on 90,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $16,700; direct labor $270,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $399,000 (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.
The company is considering a purchase of equipment that would reduce its direct labor costs by $110,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $399,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $250,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.)
Explanation / Answer
Selling expenses- 250,000 (100,000) variable-(150,000) fixed
Direct material - 16,700
Direct labour- 270,000
Adm expenses- 270,000(54,000). Variables (216,000)fixed
Variable expenses total= 720,000
Fixed expenses total=4,85,000
Contribution margin=sales price-variable cost
900,000-720,000= 180,000
Contribution margin ratio=contribution margin/sales revenue
180,000/900,000=0.2
Break even sales in dollars=fixed cost/ contribution margin ratio
485,700/0.2=2428500