How many additional units would the company have had to sell in 2009 in order to earn net income of $30,000? 3. If the company is able to reduce variable costs by $2. 50 per unit in 2009 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $35,000?
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Breakeven point in units= 1,920,000 / ($10 -$6) = 1,920,000 / 4 = 480,000 units needed to sell to break-even Breakeven point in dollars = Breakeven point in units x sales price = 480,000 x $10 = $4,800,000 b- Margin of Safety = Total sales ? Break even sales Total sales = 600,000 units x $10 per unit = $6,000,000; Breakeven sales from above = $4,800,000 Margin of safety in dollars = $6,000,000 – 4,800,000 = $1,200,000 Margin of Safety ratio = Margin of safety in dollars / Total sales = $1,200,000 / 6,000,000 =0. 2 = 20% (c)Net Income Sales$6,000,000 Variable Costs(3,600,000) Fixed Costs(1,920,000) Net Income$ 480,000
The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Mr. Dibson is considering two options to improve profitability. One would reduce variable costs to $0. 75, and the other would reduce fixed costs to $35,000. Profit = (selling price ? maximum units) – (variable costs ? maximum units) – fixed costs Current Profit= ($3 ? 80,000) – ($1 ? 80,000) – $50,000 = $240,000 – $80,000 – $50,000 = $110,000 Option 1: The profit from reducing variable costs to $0. 75 = ($3 ? 0,000) – ($0. 75 ? 80,000) – $50,000 = $240,000 – $60,000 – $50,000 = $130,000 Option 2:
The profit from reducing fixed costs to $35,000 = ($3 ? 80,000) – ($1 ? 80,000) – $35,000 = $240,000 – $80,000 – $35,000 = $125,000 From the above calculations we can see that option 1 “reducing variable costs to $0. 75 per unit” will ensure maximum profitability of the paper doll product line Distinguish between variable and fixed costs. Fixed Costs: These are those costs which remain fixed up to certain range of work capacity no matter how much product you produce within that capacity range. Like factory building rent.
You pay the rent no matter that did you use that building for making the products or not. Variable Costs: These are those costs which change with the change in the number of product units you produce. Like Material, Labor etc. Indicate what contribution margin is and how it can be expressed Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. Thus it is the amount available to cover fixed expenses and then to provide profits for the period. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period.
It can be expressed as a per unit amount or as a ratio. It is identified in a CVP income statement, which classifies costs as variable or fixed. Define margin of safety, and give the formulas for computing it. Margin of safety is the difference between actual or expected sales and sales at the break-even point (true). The formulas for margin of safety are: Actual (expected) sales – Break-even sales = Margin of safety in dollars; Margin of safety in dollars ? Actual (expected) sales = Margin of safety ratio. Describe the sources for preparing the budgeted income statement. Prepared from the operating budgets
Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget Explain the principal sections of a cash budget. The three sections of cash budget are (receipts, disbursements, and financing) and the beginning and ending cash balances. 1. Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions. (False) 2. The high-low method is used in classifying a mixed cost into its variable and fixed elements. (True) 3. A budget can be used as a basis for evaluating performance. (True) 4.
The master budget consists of operating and financial budgets. (True) 5. Margin of safety is the difference between actual or expected sales and sales at the break-even point (true). 1. A variable cost is a cost that c. varies in total in proportion to changes in the level of activity. 2. A fixed cost is a cost which d. remains constant in total with changes in the level of activity. 3. The relevant range of activity refers to the c. levels of activity over which the company expects to operate. 4. Contribution margin d. equals sales revenue minus variable costs. 5. At the break-even point, c. contribution margin equals total fixed costs.
