Gift4U produces one single product a small reading tablet an

Gift4U produces one single product, a small reading tablet, and sells it at $120 per unit. Its current annual sales are $240,000. Its annual fixed costs include factory rent, $43,400; depreciation expense, equipment, $12,000; utilities, $22,000; insurance, $8,400. Its variable costs include materials, $36 per unit, and direct labour, $48 per unit. Gift4U\'s income tax rate is 20%.

REQUIRED

A.   What is the contribution margin per unit?

B.   What is the contribution margin ratio?

C.   How many units must Gift4U sell to break even?

D.   If Gift4U would like to earn a profit after tax of $12,000, what should the sales be? At this sales level, what is the degree of operating leverage? What is the margin of safety in units?

E.   If Gift4U would like to earn a profit after tax that is 8% of sales, what should the sales be? How many units does Gift4U need to increase from the current sales level?

please complete all parts and show work.

Solution

A. Contribution margin per unit?

Answer = Contribution/units

= $72000 / 2000unit = $36 Per unit

B.   Contribution margin ratio?

Answer = Contribution/sales*100

= $72000 / $240000 * 100

= 30%

C.   How many units must Gift4U sell to break even?

Answer = Break-even = Fixed cost/contribution

= $ 85800 / $36

= 2383 Units

D.   If Gift4U would like to earn a profit after tax of $12,000, what should the sales be?

Answer = Profit = (1- Tax rate) * ( Sales - Variable cost - Fixed cost)

Let sale = X

$12000 = (1-0.20) * (X - 168000 - 85800)

12000 + 203040 = .80X

X = 268,800

At this sales level, what is the degree of operating leverage?

Answer = Degree of operating leverage = Contribution / EBIT

= 100800/15000 = 6.72 %

What is the margin of safety in units?

Answer = Margin of safety in units = (Current sale level - Break even Level sale ) / Break-even Level sale

= (2240 - 2383 )

= -143

E.   If Gift4U would like to earn a profit after tax that is 8% of sales, what should the sales be?

Let sales = X

Profit = 0.08X

Profit = (1- Tax rate) * ( Sales - Variable cost - Fixed cost)

0.08X = (1- 0.20) * ( X - 72000 - 96000 )

0.08X - 0.8x = - 134400

X = 134400 / 0.72

X = 186667