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 $1,575,000 on 105,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $606,100; direct labor $250,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $357,000 (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.

(a) 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.)
(b) Compute the break-even point in units and sales dollars for the first year.
(c) The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target?
(d) 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?
(e) The company is considering a purchase of equipment that would reduce its direct labor costs by $104,00 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $350,000, as above). Compute (1) the contribution margin and (2) the contribution margin ration, and recomputed (3) the break-even point in sales dollars. Comment on the effect each of management's proposed changes has on the break-even point.

Explanation / Answer

Solution:

First of all we need to find out the total variable cost and contribution margin for current year.

a-1)

Current Year

Projected Year

Sales Revenue

$1,575,000

$1,732,500

(1575000*110%)

Variable Costs:

Direct material

$606,100

Direct Labor

$250,000

Variable Manufacturing Expenses

$249,900

(357,000*70%)

Variable Selling Expense

$100,000

(250,000*40%)

Variable Admn expenses

$54,000

(270,000*20%)

Total Variable Cost

$1,260,000

$1,386,000

($1,260,000*110%)

Contribution Margin (Sales - Total Variable Cost)

$315,000

$346,500

(315,000*110%)

Contribution Margin Current Year = $315,000

Contribution Margin Projected Year = $346,500

a-2) Fixed Cost for the current year

Current Year

Fixed Expenses:

Fixed Manufacturing Expenses

$107,100

(357000*70%)

Variable Selling Expense

$150,000

(250,000*60%)

Variable admn expenses

$216,000

(270,000*80%)

Total Fixed Expenses

$473,100

b) Break Even Point for first year

Break Even Point in units = Total Fixed Costs / Contribution Margin Per Unit

Contribution Margin Per Unit = Total Contribution Margin / Units Sold = 315,000 / 105,000 Units = $3 per unit

Break Even Point in units = Total Fixed Costs 473,100 / Contribution Margin Per Unit $3 = 157,700 Units

Break Even Point in dollars = Total Fixed Cost / Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin / Sales x 100 = 315,000 / 1575,000 x 100 = 20%

Break Even Point in dollars = Total Fixed Cost 473,100 / Contribution Margin Ratio 20% = $2,365,500

c) Required Sales dollar for the company to meet its target net income $200,000 = (Total Fixed Costs + Target Income) / Contribution Margin Ratio

= (473,100 + 200,000) / 20%

= $3,365,500

d) Margin of Safety Ratio = Margin of Safety in dollars / Total Sales x 100

Margin of Safety in dollars = Total Sales – Break Even Sales = 3,365,500 – 2,365,500 = $1,000,000

Margin of Safety Ratio = $1,000,000 / 3,365,500 x 100 = 29.713%

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining part.

Current Year

Projected Year

Sales Revenue

$1,575,000

$1,732,500

(1575000*110%)

Variable Costs:

Direct material

$606,100

Direct Labor

$250,000

Variable Manufacturing Expenses

$249,900

(357,000*70%)

Variable Selling Expense

$100,000

(250,000*40%)

Variable Admn expenses

$54,000

(270,000*20%)

Total Variable Cost

$1,260,000

$1,386,000

($1,260,000*110%)

Contribution Margin (Sales - Total Variable Cost)

$315,000

$346,500

(315,000*110%)

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