Draaksh Corporation sells premium quality wine for $145 per bottle. Its direct m

Question

Draaksh Corporation sells premium quality wine for $145 per bottle. Its direct materials and direct labour costs are $28 and $25 respectively per bottle. It pays its direct labour employees a wage of $31 per hour. The company performed a regression analysis using the past 12 months' data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base: y $157,700 $26.00x Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $35,800 per month for sales promotions; additionally, it has decided to offer a sales commission of $7.50 per bottle to its sales personnel. Administrative expenses are expected to be $25,900 per month. Required 1. Compute the expected total variable cost per bottle and the expected contribution margin ratio. Total variable cost Contribution margin ratio 2. Compute the annual break-even sales in units and dollars. Annual breakeven sales in units Annual breakeven sales in dollars 3. Draaksh has budgeted sales of $7.5 million for the next fiscal year. What is the company's margin of safety in dollars and as a percentage of budgeted sales? Margin of safety Budgeted sales

Explanation / Answer

1)

Total Variable cost comprises of Direct material and Direct Labour and Sales Comission since these expenses are incurred to sell an bottle also the variable portion of manufacturing overhead

I have considered the Variable 'x' as 1 for solution or can say 1 per unit

Therefore Variable cost would amount to

Note : Expenses such as wages to be paid to the labour, manufacturing overhead - Fixed cost portion, administrative expenses, amount for sales promotion of personnel are fixed in nature, since they are going to be incurred irrespective of sales made

Calculation of Contibution margin Ratio = Contribution / Sales *100

Contibution margin Ratio is also termed P/V Ratio

2)

BEP means it is at that point of sales made, where there is neither profit nor sale

Annuak break even sales in units = Total Fixed Costs/ Contribution per unit *12 months

= 219400/58.5 = 3750.427= 3750 units

= 3750*12 =45000 Units

Annuak break even sales in units = Total Fixed Costs/ Contribution Margin Ratio

= 219400/ 40.34% = 543812 = 543800

=543800*12 =6525000

3)

Margin of Safety means the Amount of sales exceeding the Break Even point

M0S(Margin of Safety) = Budgeted Sales- BEP(Break even point, in Sales)

= $7,500,000- $6,525,000

= $975,000

In Percentage = Budgeted Sales- BEP(Break even point, in Sales)/Bugeted Sales

   = $7,500,000- $6,525,000/$7,500,000 * 100

   = 13%

Sales $ 145 Total variable cost $ 86.5 Contribution $58.5

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.