This year, Bernard Company sold 40,000 units of its only product for $25 per uni
ID: 2427568 • Letter: T
Question
This year, Bernard Company sold 40,000 units of its only product for $25 per unit. Manufacturing and selling the product required $200,000 of fixed manufacturing costs and $325,000 of fixed selling and administrative costs. The company’s per unit variable costs follow:
5.00
1.00
0.50
Next year, the company will use new material, which will reduce material costs by 50% and direct labor costs by 60%, and will not affect 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 45,000 units. The company is considering two plans. 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 10%. 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.
Material $8.00 Direct Labor (paid on the basis of completed units)5.00
Variable overhead costs1.00
Variable selling and administrative costs0.50
Explanation / Answer
Calculation of the break-even point in dollar sales
Plan 1
Plan 2
Units Sales
40000
36000
(40000*90%)
Sales Price (A)
$ 25.00
$ 30.00
Variable costs :
(25*120%)
Direct Material cost per unit
$ 4.00
$ 4.00
(8*50%)
(8*50%)
Direct labor cost per unit
$ 2.00
$ 2.00
(5*40%)
(5*40%)
Variable Overhead cost per unit
$ 1.00
$ 1.00
Variable selling cost per unit
$ 0.50
$ 0.50
Total Variable costs (B)
$ 7.50
$ 7.50
Contribution Margin Per unit © = A-B
$ 17.50
$ 22.50
Contribution Margin % =D= C/A
70.00%
75.00%
Fixed manufacturing costs
$ 200,000.00
$ 200,000.00
Fixed selling and administrative costs
$ 325,000.00
$ 325,000.00
Total Fixed costs (E)
$ 525,000.00
$ 525,000.00
Break even Sales ($) = E/D
$ 750,000.00
$ 700,000.00
Forecasted contribution margin income statement
Sales
$ 1,000,000.00
$ 1,080,000.00
(40000*25)
(36000*30)
Less: Total Variable costs
$ 300,000.00
$ 300,000.00
(40000*7.5)
(40000*7.5)
Contribution Margin
$ 700,000.00
$ 780,000.00
Less: Total Fixed costs
$ 525,000.00
$ 525,000.00
Income before taxes
$ 175,000.00
$ 255,000.00
Less: Taxes @30%
$ 52,500.00
$ 76,500.00
Net Income
$ 122,500.00
$ 178,500.00
Calculation of the break-even point in dollar sales
Plan 1
Plan 2
Units Sales
40000
36000
(40000*90%)
Sales Price (A)
$ 25.00
$ 30.00
Variable costs :
(25*120%)
Direct Material cost per unit
$ 4.00
$ 4.00
(8*50%)
(8*50%)
Direct labor cost per unit
$ 2.00
$ 2.00
(5*40%)
(5*40%)
Variable Overhead cost per unit
$ 1.00
$ 1.00
Variable selling cost per unit
$ 0.50
$ 0.50
Total Variable costs (B)
$ 7.50
$ 7.50
Contribution Margin Per unit © = A-B
$ 17.50
$ 22.50
Contribution Margin % =D= C/A
70.00%
75.00%
Fixed manufacturing costs
$ 200,000.00
$ 200,000.00
Fixed selling and administrative costs
$ 325,000.00
$ 325,000.00
Total Fixed costs (E)
$ 525,000.00
$ 525,000.00
Break even Sales ($) = E/D
$ 750,000.00
$ 700,000.00
Forecasted contribution margin income statement
Sales
$ 1,000,000.00
$ 1,080,000.00
(40000*25)
(36000*30)
Less: Total Variable costs
$ 300,000.00
$ 300,000.00
(40000*7.5)
(40000*7.5)
Contribution Margin
$ 700,000.00
$ 780,000.00
Less: Total Fixed costs
$ 525,000.00
$ 525,000.00
Income before taxes
$ 175,000.00
$ 255,000.00
Less: Taxes @30%
$ 52,500.00
$ 76,500.00
Net Income
$ 122,500.00
$ 178,500.00
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