11. CVP analyses (18 points) characteristies for teres and lls a high-end gaming
ID: 2570339 • Letter: 1
Question
11. CVP analyses (18 points) characteristies for teres and lls a high-end gaming keyboard with the following price and Selling price per unit Units of products sold Total variable costs per unit Total fixed manufacturing costs Total fixed administrtive costs $125.00 7,500 $75 100,000 $80,000 What was the margin of safety in sales dollars in year 2016? Ans: S a. a year but increase the variable cost by $0.5 per unit while sales volume will continue to be 7,500 units. By how much would net operating income change if the technology is used? b. Magic Games is considering using a new technology that will decrease fixed costs by $9,000 Increase or Decrease (circle one) Ans: $ c. How many units of products must Magic Games sell to make an operating profit of $120,000 for a year? units Ans:Explanation / Answer
Answer to Part a)
Margin of Safety (in Sales dollars) = Current Sales – Break Even Sales
Break Even Sales = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin / Sales * 100
Contribution Margin = Sales – Variable Cost
Contribution Margin = $125 - $75 = $50
Contribution Margin Ratio = 50 / 125 * 100
Contribution Margin Ratio = 40%
Fixed Cost = $100,000 + $80,000 = $180,000
Break Even Sales = 180,000 / 0.40
Break Even Sales = $450,000
Margin of Safety (in Sales dollars) = (7,500 * $125) - $450,000
Margin of Safety (in Sales dollars) = $937,500 - $450,000
Margin of Safety (in Sales dollars) = $487,500
Answer to Part b)
Current Situation:
Net Operating Income = Sales – Variable Expense – Fixed Cost
Net Operating Income = (7,500 * $125) – (7,500 * $75) - $180,000
Net Operating Income = $937,500 - $562,500 - $180,000
Net Operating Income = $195,000
Proposed Situation:
Expected Fixed Cost = $180,000 - $9,000 = $171,000
Expected Variable Cost = $75 - $0.50 = $74.50
Net Operating Income = Sales – Variable Expense – Fixed Cost
Expected Net Operating Income = (7,500 * $125) – (7,500 * $74.50) - $171,000
Expected Net Operating Income = $937,500 - $558,750 - $171,000
Expected Net Operating Income = $207,750
The Net Operating Income would increase by $12,750 ($207,750 - $195,000).
Answer to Part c)
Net Operating Income = Sales – Variable Expense – Fixed Cost
Let the Number of Units to be sold to earn an Operating Profit of $120,000 be “x units”
$120,000 = ($125 *x) – ($75 * x) - $180,000
$300,000 = $50x
x = 6,000 units
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