This year Burchard Company sold 30,000 units of its only product for $19.00 per

Question

This year Burchard Company sold 30,000 units of its only product for $19.00 per unit. Manufacturing and selling the product required $115,000 of fixed manufacturing costs and $175,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Next year the company will use new material, which will reduce material costs by 60% and direct labor costs by 40% and will not affect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 35,000 units. Two plans are being considered. Under plan 1, the company will keep the price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. (Round "per unit answers" and "CM ratio" percentage answer to 2 decimal places.)

Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (32% rate), and net income.

This year Burchard Company sold 30,000 units of its only product for $19.00 per unit. Manufacturing and selling the product required $115,000 of fixed manufacturing costs and $175,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Explanation / Answer

Per unit: Plan 1 Plan 2 Sales 19 22.8 (19*120%) Variable Costs: Material                       1.40                      1.40 (3.5*40%) (3.5*40%) Direct labor 1.5 1.5 (2.5*60%) (2.5*60%) Variable overhead costs 0.35 0.35 Variable S&A costs 0.15 0.15 Total variable costs                       3.40                      3.40 Contribution margin                     15.60                    19.40 Plan 1 Contribution margin ratio Choose Numerator: / Choose Denominator: = Contribution margin ratio Contribution margin per unit / Selling price per unit = Contribution margin ratio                     15.60 / 19 = 0.82105263 82.11% Break-even point in dollars Choose Numerator: / Choose Denominator: = Break-even point in dollars Total fixed costs / Contribution margin ratio = Break-even point in dollars 290000 / 82.11% = 353205.128 (115000+175000) 0 Plan 2 Contribution margin ratio Contribution margin per unit / Selling price per unit = Contribution margin ratio                     19.40 / 22.8 = 0.85087719 85.09% Break-even point in dollars Total fixed costs / Contribution margin ratio = Break-even point in dollars 290000 / 85.09% = 340824.742 (115000+175000) 0 BURCHARD CO. Forecasted Contribution Margin Income Statement Plan 1 Plan 2 Number of units: 30,000 27,000 Sales 570000 615600 (30000*19) (27000*22.8) (-) Total variable costs 102000 102000 (3.4*30000) (3.4*30000) Contribution margin 468000 513600 Total fixed costs 290000 290000 income before taxes 178000 223600 income tax @ 32% 56960 71552 Net Income $1,21,040 $1,52,048

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