Lorge Corporation has collected the following information after its first year o

Question

Lorge Corporation has collected the following information after its first year of sales. Sales were $2,100,000 on 105,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $1,006,700; direct labor $240,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $399,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.

Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.)

The company has a target net income of $160,000. What is the required sales in dollars for the company to meet its target?

If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.)

The company is considering a purchase of equipment that would reduce its direct labor costs by $100,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $399,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $250,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.)

Explanation / Answer

BEP = Fixed cost / (Selling price per unit - variable cost per unit)

= 485700/(20-16)

= 121425 units

in $ = 121425*20

= 2428500

2. sales required to earn target net income = (160000 + 485700)/4*(20)

= 645700/4*(20)

= 161425*20

= 3228500

3. Margin of safety ratio %= Marin of safety / Actual sales *100

Margin of safety = total sales - breask even sales

= 3228500 - 2428500

= 800000

Margin of safety % = 800000/3228500*100

= 24.77%

(b) Computation when given changes will be done -

(1) Contribition margin = 554600

(2) contribution margin ratio = contribution margin / sales

= 554600/2100000

= 26.40%

(3)BEP = 520300/(20 - 14.72)*20

= 98506*20

= 1970120

Please comment in case of further clarification required/wrong.

Current year Next year unit sold 105000 115500 per unit cost Sales 2100000 20 2310000 variable cost: selling expenses 100000 0.95 110000 direct material 1006700 9.59 1107370 direct labor 240000 2.29 264000 administrative expenses 54000 0.51 59400 manufacturing overhead 279300 2.66 307230 Total variable cost 1680000 16 1848000 Contribution Margin (Sales - total variable cost) 420000 462000 fixed cost: selling expenses 150000 150000 administrative expesnes 216000 216000 manufacturing overhead 119700 119700 Total fixed cost 485700 485700 -65700 -23700

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