Grange Manufacturing Company had net income of $300,000 in 2017 when the selling
ID: 2517696 • 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
$80
Fixed Costs:
Manufacturing Overhead
$225,000
Advertising
45,000
Administrative
150,000
$420,000
i) Compute the number of units sold in 2017, using the equation method.
iv) Calculate the margin of safety in number of units and sales dollars.
v) 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 2 cm to represent 1,000 units on the x-axis and 2cm to represent $200,000 on the y-axis].
vi) 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?
vii) 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?
Please assist with iv to vii
Cost Schedule:
Variable Costs:
Direct Material
$28
Direct Labour
$35
Variable Manufacturing Overhead
$17
$80
Fixed Costs:
Manufacturing Overhead
$225,000
Advertising
45,000
Administrative
150,000
$420,000
Explanation / Answer
1 P.U. Amount (6000 Units) Sales (a) 200 1200000 Direct Material 28 168000 Direct Labour 35 210000 Variable O/H 17 102000 Total Variable Cost (b) 80 480000 Contribution (b/a) 120 720000 Fixed Cost Manufacturing O/H 225000 Advertising 45000 Admin 150000 Profit 300000 Contribution = 225000+45000+150000+300000 = 720000 Unit = Contribution / Contribution per unit 720000/120 = 6000 Units (iv) MOS Break even point = Fixed Cost/Contribution (420000/120) = 3500 Units Break even sales value = (3500*200) = 700000 MoS = Actual Sales - Break even sales (6000- 3500 ) = 2500 Units MoS = Actual Sales value - Break even sales value (1200000-700000) = $500000 (vi) 8% of operating profit = (300000*8%) = 24000 Contribution per unit = 120 Extra units to be sold for desired profit = Incremental desired profit/ Contribution (24000/120) = 200 Units Total units to be sold in 2018 for achieving 8 % extra operating income = 6000 + 200 = 6200 units Yes Selling of 200 units extra in a year is realistic goal (vii) Selling Price, if sell 6000 units and achieved desired profit P.U. Amount (6000 Units) Sales (a) 204 1224000 (744000+480000) Direct Material 28 168000 remain unchanged Direct Labour 35 210000 remain unchanged Variable O/H 17 102000 remain unchanged Total Variable Cost (b) 80 480000 remain unchanged Contribution required (b/a) 124 744000 required Fixed Cost Manufacturing O/H 225000 Advertising 45000 Admin 150000 Profit 324000 (300000*1.08) Selling Price = $204 Note: Do reverse calculation
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