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.

The company is considering a purchase of equipment that would reduce its direct labor costs by $110,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $357,000, 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

Units Existing ($) Units Proposed ($) Sales 105000 1575000 Sales 115500 1732500 Less: Variable Cost Less: Variable Cost Direct Materials 105000 606100 Direct Materials 115500 666710 Direct Labour 105000 250000 Direct Labour 115500 140000 Administrative exp 105000 54000 Administrative exp 54000 (270000*20%) (270000*20%) Manufacturing Overhead 105000 249900 Manufacturing Overhead 107100 (357000*70%) (357000*30%) Selling exp 105000 100000 Selling exp 225000 (250000*40%) (250000*90%) Total Variable Cost 1260000 Total Variable Cost 1192810 Contribution 105000 315000 Contribution 115500 539690 Less: Fixed Cost Less: Fixed Cost Administrative exp 105000 216000 Administrative exp 216000 (270000*80%) (270000*80%) Manufacturing Overhead 105000 107100 Manufacturing Overhead 249900 (357000*30%) (357000*70%) Selling exp 105000 150000 Selling exp 25000 (250000*60%) (250000*10%) Total Fixed Cost 473100 Total Fixed Cost 490900 Profit/(Loss) -158100 Profit/(Loss) 48790 Depreciation has not been considered as no method of depreciation is given in the question Contibution Margin= Contribution/Sales*100 Contibution Margin= Contribution/Sales*100 20.00 31.15 Break Even Point =Fixed Cost/Contribution Margin 1575876

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