[The following information applies to the questions displayed below.] This year
ID: 2417461 • Letter: #
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[The following information applies to the questions displayed below.] This year Burchard Company sold 25.000 units of its only product for $20.00 per unit. Manufacturing and selling the product required $110,000 of fixed manufacturing costs and $170,000 of fixed selling and administrative costs. Its per unit variable costs follow. Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 50% and will not effect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 30.000 units. Two plans are being considered. Under plan 1. the company will keep the price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2. the company will increase price by 20%. This plan will decrease unit sales volume by 5%. Under both plans 1 and 2. the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. (Round "per unit answers" and "CM ratio" percentage answer to 2 decimal places.). Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.Explanation / Answer
18.
1.
Compute the breakeven point in dollar sales for both (a) plan 1 and (b) plan 2:
Plan 1
Contribution margin ratio = Contribution margin / Sales * 100
= $427,500/$500,000
= 85.50%
Breakeven point in dollars = Fixed costs / Contribution ratio
= ($110,000+$170,000) / 85.50
= $327,485
Plan 2
Contribution margin ratio = Contribution margin / Sales * 100
= $501,125/$570,000
= 87.92%
Breakeven point in dollars = Fixed costs / Contribution ratio
= ($110,000+$170,000) / 87.92
= $318,471
19.
2.
Prepare forecasted contribution margin income statement:
B Co.
Forecasted margin income statement
Plan 1
Plan 2
Number of units
25000
23750
Sales (as computed above)
$ 500,000.00
$ 570,000.00
Less: Total variable costs
$ 72,500.00
$ 68,875.00
Contribution margin
$ 427,500.00
$ 501,125.00
Less: Total fixed costs ($110,000+$170,000)
$ 280,000.00
$ 280,000.00
Income before taxes
$ 147,500.00
$ 221,125.00
Less: Income taxes @ 30%
$ 44,250.00
$ 66,337.50
Net income
$ 103,250.00
$ 154,787.50
B Co.
Forecasted margin income statement
Plan 1
Plan 2
Number of units
25000
23750
Sales (as computed above)
$ 500,000.00
$ 570,000.00
Less: Total variable costs
$ 72,500.00
$ 68,875.00
Contribution margin
$ 427,500.00
$ 501,125.00
Less: Total fixed costs ($110,000+$170,000)
$ 280,000.00
$ 280,000.00
Income before taxes
$ 147,500.00
$ 221,125.00
Less: Income taxes @ 30%
$ 44,250.00
$ 66,337.50
Net income
$ 103,250.00
$ 154,787.50
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