Bill Johnson, sales manager, and Diane Buswell, controller, at Current Designs a

Question

Bill Johnson, sales manager, and Diane Buswell, controller, at Current Designs are beginning to analyze the cost considerations for one of the composite models of the kayak division. They have provided the following production and operational costs necessary to produce one composite kayak.

Kevlar $250 per kayak

Resin and supplies $100 per kayak

Finishing kit (seat, rudder, ropes, etc.) $170 per kayak

Labor $420 per kayak

Selling and administrative expenses—variable $400 per kayak

Selling and administrative expenses—fixed $119,700 per year

Manufacturing overhead—fixed $240,000 per year

Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget projections for the upcoming year. Bill has informed you that the selling price of the composite kayak will be $2,000.

a) Calculate variable costs per unit.
Variable cost per unit $

Explanation / Answer

Current Designs a Details Amt $ Unit Variable costs   Kevlar                     250 per Kayak Resin & Supplies                     100 per Kayak Finishing Kit                     170 per Kayak Labor                     420 per Kayak Variable selling & Admin                     400 per Kayak Total Variable cost per Unit =                 1,340 per Kayak b Details Amt $ Selling Price per Kayak                 2,000 Less : Variable cost per unit                 1,340 Contribution margin per unit=                     660 Break even sales =660*2000=         1,320,000 c Total Fixed costs Details Amt $ Fixed Manufacturing Cost per year             240,000 Fixed Selling & Admin costs per year             119,700 m Total Fixed cost per year               359,700 n Contribution margin per unit=                     660 Break Even Units per year =m/n=                     545 nos d Required earning               270,600 Add Total fixed costs             359,700 m Total Required contribution margin=             630,300 n Contribution margin per unit=                     660 No of units to be sold for required profit=m/n=                     955 nos e When sales units =1000 Total Contribution margin =1000*660=             666,000 Sales revenue at 1000 units           2,000,000 Break even sales =660*2000=         1,320,000 Margin of safety $= $        680,000 Margin of safety ratio= Margin of safety$/Sales =680000/2000000= 34.00%

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