Grange manufacturing company had net income of $300,000 in 2017 when the selling
ID: 2517490 • Letter: G
Question
Grange manufacturing company had net income of $300,000 in 2017 when the selling price per unit was $200 and data for variable and fixed costs were as follows:
Cost Schedule:
Variable Costs:
Direct Material $28 Direct Labour $35
Variable Manufacturing Overhead $17
Total $80
Fixed Costs:
Manufacturing Overhead $225,000
Advertising 45,000
Administrative 150,000
Total $420,000
Required:
i) Compute the number of units sold in 2017, using the equation method.
ii) Calculate Grange’s break-even point in units and in dollars.
iii) Calculate the margin of safety in number of units and sales dollars.
iv) Using the sales units calculated in (i), Construct a breakeven chart for Grange Manufacturing company, clearly showing the breakeven point and the margin of safety in units and dollars and the region representing profits and losses. ( use a scale of 2cm to represent 1,000 units on the x-axis and 2cm to represent 200,000 on the y-axis)
v) The president of Grange Manufacturing is under pressure from stockholders to increase operating income by 8% in 2018. Management expects per unit data and total fixed costs to remain the same in 2018. Compute the number of units that must be sold in 2018 to reach the shareholders’ desired profit level. Is this a realistic goal?
vi) Assume that Grange Manufacturing sells the same number of units in 2018 as it did in 2017. Assuming unit variable costs and total fixed costs remain unchanged, what would the selling price have to be in order to reach the stockholders’ desired profit level?
Explanation / Answer
1) Equation Method N = Number of Units required to Break Even Sales - Variable costs - Fixed costs = Profit Profit at the break-even point is zero ($200 x N) - ($80 x N) - $420,000 = 0 $200N - $80N = $420,000 N = $420,000/($200 - $80) 3,500 Units Break Even Sales 3,500 units 2) Contribution Margin = SP - VC = $200 - $80 $120.00 Contribution Ratio = (SP - VC) /SP= $200 - $80/$200 60.00% BEP(Units) = FC/Contribution Units = $420,000/$120 3500.00 Units BEP (Dollars) = FC/Contribution Ratio= $420,000/60% $700,000.00 3) Margin of Safety (Units) = Budgeted sales - Break-even sales Margin of Safety (Units) = 6000 - 3500 2500.00 Units Margin of Safety (Dollars) = $1,200,000 - $700,000 $500,000.00 Budgeted Sales Sales volume in units = (Fixed costs + Desired profit )/Contribution Margin Per Unit Sales volume in units = ($420,000 + $300,000)/$120 6000.00 units Sales volume in Dollars = ($420,000 + $300,000)/60% $1,200,000.00
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