Lilah and Juliet’s Book Company (LJBC) sells children’s books for $10 per book.V
ID: 2542589 • Letter: L
Question
Lilah and Juliet’s Book Company (LJBC) sells children’s books for $10 per book.Variable costs are $6 per book.Fixed costs are $300,000 per year.
1. How many books must LJBC sell in 2013 to earn a target profit of $ 100,000?
10,000
25,000
16,667
75,000
100,000
2. Assume LJBC in fact makes their 2013 target profit. What is LJBC’s margin of safety in dollars?
a. $100,000
b. $250,000
c. $400,000
d. $300,000
e. $750,000
3. Danny’s Manufacturing Company (DMC) sells a baby’s high chair for $50. DMC has a contribution margin ratio of 40% and annual fixed expenses of $250,000. In 2012, DMC sold 10,000 high chairs. DMC was disappointed in its results and is contemplating the following actions:
Lower the selling price of its product by 10%.
Reduce the fixed salaries of salesmen by $50,000 and give salesmen a commission of $2.00 per high chair sold.
Change the manufacturing process to reduce variable costs by $8.00 per high chair produced while increasing fixed expenses by $150,000. If DMC implements this plan, they will increase sales volume by 20%. What is the impact to DMC’s profit if it implements the plan described above?
Reduce profits by $48,000.
Increase profits by $40,000.
Increase profits by $52,000.
Reduce profits by $100,000.
Increase profits by $12,000.
Could you please be kind enough and show me the solutions and answers in detail?
Thank you so much and have a good one! :D
Explanation / Answer
Answer :
Partuculars amount sales (10perunit) 1000000 Less Variable cost (6 perunit) 600000 Contribution 400000 Less Fixed Cost 300000 Profit 100000 let x be the unit 10x-6x=400000 4x=400000 x= 100000 since profit is given, we will go in reverse direction and calculate contribution and then keeping it equal to beloq equation; we will find number of units.HENCE NUMBER OF UNITS = 100000 CALCULATION OF MARGIN OF SAFETY MARGIN OF SAFETY = ACTUAL SALES - SALES AT BREAKEVEN ACTUAL SALES = $1000000 SALES AT BREAKEVEN = (FIXED COST / CONTRIBUTION PER UNIT ) * SALE PRICE PER UNIT FIXED COST = $300000 CONTRIBUTION = $400000/100000 = $4 SALE PRICE = $10 SALES AT BREAKEVEN POINT =( 300000/4)*10 = $750000 MARGIN OF SAFETY IN $ = $ 100000- $750000 = $250000 OLD NEW UNIT SOLD 10000 12000 EXISTING PROPSED UNIT PRICE 50 45 SALES =$500000 SALES= $540000 FIXED COST 250000 350000 VC =$300000 VC=$252000 VC (PERUNIT) 30 24 CONTRIBUTION =$200000 CONTRIBUTION=$288000 CONTRIBUTION= SALES-VARIBALE COSTPROFIT= CONTRIBUTION- FIXED COST FIXED COST= $250000 FC=$350000 Loss = $50000 Loss=$98000 LOSS WILL INCREASE BY $48000 = REDUCE PROFIT BY $48000
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