Q 3 Jassim Compagny is producing only one product. Two types of direct materials
ID: 2342841 • Letter: Q
Question
Q 3 Jassim Compagny is producing only one product. Two types of direct materials are used to produce this product direct material type A and direct material type B.
The estimated data for Jassim Compagny is as following:
Sales $90,000
Costs:
Direct materials type A $40,000
Hourly employees 15,000
Manager’s salary 10,000
Direct materials type B 5,000
Marketing 10,000
Total Costs 80,000
Budgeted pretax profit $ 10,000
The marketing costs include $5,000 that does not change with the change in sales volumes. The income tax rate is 20%.
a. Compute the revenues needed to achieve a target after-tax income of $30,000.
b. What is the margin of safety in revenue?
Explanation / Answer
Sales revenue- Breakeven Point
90000-54000
$ 36,000.00
Sales $90,000 Variable Costs: Direct materials type A $40,000 Hourly employees $15,000 Direct materials type B $5,000 Marketing $5,000 Contribution Margin $25,000 Contribution Margin ratio 0.27777778 Target-Post tax Profit $ 30,000.00 Tax rate 20% Pre tax Profit to be achieved(30000/100%-20%) $ 37,500.00 Calculation of fixed Cost Manager’s salary $ 10,000.00 Marketing $ 5,000.00 Fixed Cost $ 15,000.00 Revenue required to achieved target income 15000+37500/0.27777778 $ 189,000.00 Calculation of Breakeven Point Formula Fixed cost/Contribution margin ratio 15000/0.27777778 Breakeven Point $ 54,000.00 Calculation of margin of safety FormulaSales revenue- Breakeven Point
90000-54000
margin of safety$ 36,000.00
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