PROBLEM #1 - Week 5 Best Harmonica Company manufactures and sells harmonicas to

Question

PROBLEM #1 - Week 5

Best Harmonica Company manufactures and sells harmonicas to distributors. The model they produce sells to the distributors for $8.00 each. Following are cost estimates: Sales $3,480,000 Direct materials 543,750 Direct labor 761,250 Manufacturing overhead–variable 152,250 Manufacturing overhead–fixed 640,000 Selling expenses–variable 78,300 Selling expenses–fixed 300,000 Administrative expenses–variable 47,850 Administrative expenses–fixed 185,000 Instructions A. Prepare a CVP income statement based on these cost estimates. B. Commute contribution margin ratio. C. Compute the break-even point in (1) units and (2) dollars. D. Compute the margin of safety ratio. E. Determine the sales dollars required to earn net income of $1,000,000.

Explanation / Answer

Solution: 1

Solution:2

Contribution margin ratio= Contribution margin/ sales= 2657850/3480000 = 76.37%

Solution:3

Break even point occurs when sales becomes equal to costs. Let X be the break even unit, then

1886250 + 1.89 * X= 8* X

6.11* X=1886250

X= 1886250/6.11= 308715 units to break even

Break even point in dollars = 308715 * $8= $2469720

Working note:

Units sold = sales/ unit sale price =3480000/8 = 435000

Variable unit price = Variables cost / units sold = 822150/435000 = 1.89 price per unit

Solution:4

Margin of safety ratio = (actual sales - break even sales)/ actual sales * 100

= 3480000 - $2469720 = 1010280 / 3480000= 0.2903 = 29.03%

Solution:5

Net income + Fixed cost = contribution margin

1000000+1886250 = 2886250

Contribution margin + variable costs = sales

2886250 + 822150 = $3708400

CVP income statement sales 3480000 Direct material 543750 Manufacturing overhead 152250 cost of goods sold(variable) $    6,96,000.00 selling expenses $       78,300.00 administrative expenses $       47,850.00 Total variable expenses $    8,22,150.00 contribution margin $ 26,57,850.00 Direct labor $    7,61,250.00 Manufacturing overhead(fixed) $    6,40,000.00 cost of goods sold(fixed) $ 14,01,250.00 selling expenses $    3,00,000.00 administrative expenses $    1,85,000.00 total fixed expenses $ 18,86,250.00 Net operating income $    7,71,600.00

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