Webb Company sells fags with team logos. Webb has fixed costs of $858,000 per ye

Question

Webb Company sells fags with team logos. Webb has fixed costs of $858,000 per year plus variable costs of $5.20 per flag. Each flag sells for $13.00 Read the Requirement 1. Use the equation approach to compute the number of flags Webb 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 Webb must sell each year to break even is Requirement 2. Use the contribution margin ratio approach to compute the dollar sales Webb needs to eam $7,800 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 $7,800 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 Requirement 3. Prepare Webb's contribution margin income statement for the year ended December 31, 2018, for sales of 106,000 flags. (Round your final answers up to the next whole number.) (Use parentheses or a minus sign for an operating loss.) Webb Company Choose from any list or enter any number in the input fields and then continue to the next question.

Explanation / Answer

Ans.

SP = $13

variable cost = $5.20

contribution = 13-5.20= 7.80

P/v ratio =7.80/13 =60%

fixed xost = $858000

Break even point=858000/.60=$1430000

no of unit in break even = 1430000/13= 110000 units

requirement 2.

sales required to earn profit amt = $7800

Desired sales ($858000+$7800) = $865800/.60 = $1443000

In units desired sales = $1443000/13 = 111000 units

Requirement 3, Total no of flag sales is 106000

                                             Contribution margin Satement

Sales (106000X13)                               :         $1378000

V/c(5.20X106000)                                 :        ($551200)

contribution                                           :         $826800

fixed cost                                              :         ($858000)

net loss                                                 :         ($31200)

New cost after expansion

new variable cost (5.20+1.30) = $6.50 per flag

New fixed cost (858000+20%) =$1029600

sales price remain same : $13

contribution per unit (13-6.50) =$6.50

P/v ratio = 6.50/13 =50%

Break even point = 1029600/.50= $2059200

break even sales in unit = 2059200/13=158400 flag

comment : it is not good to take expansion because it will reduced the p/v ratio, increasing the cost both variable and fixed without increasing the sales price. it will decrease the profitability. so expansion program not acceptable

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