Native American Pottery expects to earn a profit of $95,000 in 20xx. The company

Question

Native American Pottery expects to earn a profit of $95,000 in 20xx. The company manufactures ornamental ceramic tiles. Each lot of 100 blocks requires variable costs of $5.00 for direct materials, $3.50 for direct labor, and $4.50 for overhead. Total variable costs are thus $13 per lot. Fixed costs for 20xx are expected to be $130,000. Each hundred-block lot will sell for $33. (10 Points)

a. Determine how many lots of ceramic tiles the company must sell to earn its targeted profit, and convert this amount to sales dollars.

b. Compute breakeven sales in dollars.

c. Explain the dollar difference between breakeven sales dollars and the sales dollars necessary to earn the targeted profit. Use the contribution margin as part of your explanation.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Number of Cermic Tiles = (Fixed Cost + Desired Profit)/(Selling Price - Total Variable Cost) = (130000 + 95000)/(33 - 13) = 11250 tiles.

Total Sales Value = Number of Cermic Tiles*Selling Price = 11250*33 = $371250

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Part B:

Break Even Point = Fixed Cost/Contribution Ratio

Contribution Ratio = (Selling Price - Variable Cost)/Selling Price*100 = (33-13)/33*100 = 60.61%

Break Event Point (Dollars) = 130000/60.61% = $214500

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Part C:

Dollar Difference = Targeted Sales - Break Even Point Sales = 371250- 214500 = $156750

The excess of Sales over break even sales indicates the margin of safety.

Thanks.

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