Draaksh Corporation sells premium quality wine for 105 per b

Draaksh Corporation sells premium quality wine for $105 per bottle. Its direct materials and direct labour costs are $20 and $11.50 respectively per bottle. It pays its direct labour employees a wage of $23 per hour.

The company performed a regression analysis using the past 12 months’ data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base:

Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $34,200 per month for sales promotions; additionally, it has decided to offer a sales commission of $5.50 per bottle to its sales personnel. Administrative expenses are expected to be $25,100 per month.

Compute the expected total variable cost per bottle and the expected contribution margin ratio.

Draaksh has budgeted sales of $8.6 million for the next fiscal year. What is the company’s margin of safety in dollars and as a percentage of budgeted sales? (Round your intermediate and final answers to the whole number.)

Solution

1)Total Variable cost =Direct material +Direct labor + variable manufacturing overhead+ variable selling

      = 20+11.5+22+5.5

        = $ 59 per bottle

Expected contribution margin ratio = [price -variable cost ]/price

            =[105-59]/105

            = 46/105

             = .4381 or 43.81%

2)Fixed cost = 153700+34200+25100=213000

BEP(unit)= Fixed cost /(price-variable cost)

           = 213000/(105-59)

             =213000/ 46

             =4631 bottles

BEP($) =Fixed cost /CM ratio

      = 213000/.4381

      = $ 486,191 per month

3)Margin of safety sales =Budgeted sales for next year -break even point sales for year

                     = 8,600,000- [486191*12]

                     = 8,600,000- 5,834,292

                    = $ 2,765,708

Margin of safety % =MOS sales /Budgeted sales

             = 2,765,708/8,600,000

                = .3216 or 32.16%   [rounded to 32%]