Smoky Corporation produces barbecues, selling each unit for $1,000. Current annu
ID: 2456579 • Letter: S
Question
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
1.Calculation of contribution per unit
Total Variable costs per unit = $300 per unit
Selling price per unit = $1000 per unit
Therefore contribution margin per unit =$1000-$300 = $700 per unit
Contribution margin ratio= $700/$1000 = 70%
2.
a)Break even points in units = Total fixed manufacturing costs/Contribution per unit = 560000/700 = 800 units
b)Break even point in sales dollars = 800 units * $1000 = $800000
3.
a)Margin of safety in units = Budgeted sales-Break even sales = 1800-800 = 1000 units
b) Margin of safety in sales dollars = 1000 units * $1000 = $1000000
4.
Current sales = 1800 * $1000 = $1800000
Current before tax profit = 1800000 - (1800*$300)[Variable expense] - $560000[fixed expense] = $700000
If sales increase by 50% i.e. = [1800+(1800*50%) * $1000] = $2700000
If sales increase by 50%, before tax profit = 2700000 - (2700*$300)-$560/00 = $1330000
Increase in before tax profit = $1330000-$700000 = $630000
Increase in before tax profit % = 630000*100/$700000 = 90%
Degree of operating leverage = % Change in EBIT/% Change in Sales = 90/50 = 1.8
5)
Tax rate = 25% then if before tax profit = 100 then after tax profit = 100-25(taxes) = 75
IF after tax profit = $397500, then before tax profit = 397500*100/75 = $530000
Contribution = Before tax profit+ Fixed cost = 530000+560000 = $1090000
Contribution per unit = $1090000/700 per unit = 1557.142857 units i.e. 1558 units
Therefore to earn after tax profit of $397500 we need to sell 1558 units
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