Kincaid Company sells flags with team logos kincaid has fixed costs of $810 000

Question

Kincaid Company sells flags with team logos kincaid has fixed costs of $810 000 per year plus variable costs of S6 00 per ag tach flag sells for S15 . Read the requirements. Requirement 1. Use the equation approach to compute the number of flags Kincaid must sell each year to break even First, select the formula to compute the required sales in units to break even Target profit Rearrange the formula you determined above and compute the required number of flags to break even The number of flags Kincaid must sell each year to break even is Requirement 2. Use the contribution margin ratio approach to compute the dollar sales Kincaid needs to ean 27,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.) Begin by showing the formula and then entering the amounts to calculate the required sales dollars to eam $27,000 in operating income. (Round the required sales in dollars up to the nearest whole dollar. For example, $10.25 would be rounded to $11. Abbreviation used: CM contribution margin) = Required sales in dollars )7

Explanation / Answer

1. Equation to calculate Break even Let assume no. of units to be sold for breakeven is "X" Target profit should be 0 for breakeven. So, Formula (No. of units sold * Sales price ) - (No. of units sold * Variable cost) - Fixed cost = Target Profit (15X-6X-810000)=0 9X-810000=0 9X=810000 X=810000/9 X=90,000 So, no. of flags to be sold for break even is 90,000 2. Sales dollars required to earn $ 27000 Contribution margin per flag = 9/flag ($15-$6) Contribution margin per flag (%) = 9/15 = 60% Formula, (Target profit + Fixed Cost)/Contribution ratio = Required sales in dollars (27,000+810,000)/.60 (837000/.60) So, Required sales in dollars = $ 1,395,000 3. Contribution margin statement for sale of 87,000 flags ($) Contribution (87,000 flags * 9/ flag           7,83,000 Less : Fixed cost         (8,10,000) Operating Income/ (loss)             (27,000) 4. Expansion plan Break even after expansion Revised Fixed cost : 810000*1.2 = 972,000 Revised variable cost : (6+1.5 = 7.5) So, Formula (No. of units sold * Sales price ) - (No. of units sold * Variable cost) - Fixed cost = Target Profit (15X-7.5X-972000)=0 7.5X-972000=0 7.5X=972000 X=972000/7.5 X=129,600 So, no. of flags to be sold for break even is 129,600 Break even point in $ would be : 129,600 flags * 15/flag = 1,944,000 Since, Breakeven is increasing from expansion, it is not advisable for expansion plan.

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