PLEASE EXPLAIN YOUR WORK Smoky Corporation produces barbecues, selling each unit
ID: 2455164 • Letter: P
Question
PLEASE EXPLAIN YOUR WORK
Smoky Corporation produces barbecues, selling each unit for $1,000. Current annual production and sales volume is 1,800 barbecues. This is the activity level used by the company to determine its fixed manufacturing overhead rate. The company has a 25% tax rate. Other cost information is as follows:
Compute the contribution margin and CM ratio for the company.
a) What is the contribution margin per unit?
b) what is the contribution margin ratio (in percentage)? ___%
Compute the break-even point in units and in sales dollars for the company.
a) what is the break even points in units?
b) what is the break-even point in sales dollars?
3. Compute Smoky’s margin of safety in units and in dollars.
a) what is the margin of safety in units?
b) what is the margin of safety in dollars?
4. Compute Smoky’s degree of operating leverage. If sales increase by 50%, by how much will before-taxprofit increase? (Round "Degree of operating leverage" to 3 decimal places and "Before-tax profit increase" to the nearest whole percent, (i.e., 0.123 should be considered as 12%).)
a) what is the degree of operating leverage?
b) what is the before-tax profit increase (in percentage)? _____%
5) If the company wants to earn $397,500 after taxes, how many units will it have to sell? (Do not round intermediate calculations. Round up your answer to the next whole number.)
a) what is the units sold?
Smoky Corporation produces barbecues, selling each unit for $1,000. Current annual production and sales volume is 1,800 barbecues. This is the activity level used by the company to determine its fixed manufacturing overhead rate. The company has a 25% tax rate. Other cost information is as follows:
Explanation / Answer
Selling Price= 1000 $
Sales Volume= 1800
Tax Rate= 25%
Fixed manufacturing overhead rate= 560000/1800=311 per unit
Contribution Margin= Revenue - Variable Expense= 1000-(48+8)=944
Contribution Margin Rate= Fixed Expense/Contribution Margin= 944/1000
Break even point Units= 560000/944=593
Break even/unit= Total Fixed expense/Contribution Margin Ratio= 560000/94,4%= 593220
Margin of Safety Units= Budgeted Units- Breakeven Units= 1800-593=1207
Margin of units Sales= Budgeted Sales - Breakeven Sales= 1800000-593220=1207000 $
(Assume Budgeted Sales= Actual Sales)
Degree of Operating Leverage=% change in EBIT/%change in Sales= 94.4/50=1.89%
actual Before tax profit =1800000-(300*1800)-560000=700000
Before tax profit=sales -variable cost -fixed expenses
if sales inceases to 50%
new sales =1800000+50%=2700000(assumng units sold increases=1800+50%=2700)
2700000-(300*2700)-560000=1330000
%increase in earning before taxes=1330000-700000/700000*100=90%
units to be sold for desired profit=Fixed cost +desired profit/contribution margin in units
560000+397500(1-.25)/944=909
units sold =944
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