Albright Manufacturing which maintains the same level of inv

Albright Manufacturing, which maintains the same level of inventory at the end of each year, provided the following information about expenses anticipated for next year:

Fixed Expenses Variable Expenses per unit sold Production Costs: $2.30 Direct Materials $4.70 Direct Labor $3.00 Factory Overhead $225,000 Selling Expenses: Sales salaries and commissions $97,000 $0.75 Advertising $47,500 Miscellaneous selling expense $16,200 General Expenses: Office salaries $92,000 Supplies $12,300 $0.25 Miscellaneous general expenses $15,000 Total $505,000 $11.00

The selling price of single product is $16. In recent years, profits have fallen and management is now considering a number of alternatives. Albright wants to have a net income next year of $250,000, but expects to sell only 120,000 units unless some changes are made.

Requirement:

? Compute the breakeven point.

? The president of Albright has asked you to calculate the company’s projected net income (assuming 120,000 units are sold) and the sales needed to achieve the company’s net income objective for next year. Also, compute Albright’s contribution margin per unit, contribution margin ratio, and breakeven point for next year.

? Based on Albright’s current situation, will it earn its target net income? If not, how many units need to be sold to achieve the target?

Solution

Rreq 1: Total Variable cost per unit: Production cost 2.3 Direct Material 4.7 Direct Labor 3 Sales commission 0.75 Supplies 0.25 Total Variable cost per unit: 11 Selling price per unit 16 Contribution Margin per unit 5 CM ratio: 5/16 *100 = 31.25% Break even point in units: Total Fixed cost / CM per unit 505000 /5 = 101000 Break even in $: Total Fixed cost/ CM ratio 505000 /31.25% = $ 1616,000 Req 2: Projected net income: Sales revnue (120000*16) 1920000 Less: Variable cost (120000*11) 1320000 Contribution margin 600000 Less: Fixed cost 505000 Net income 95000 Req c: So, the management will not be able to earn taget income in the current situation next year. Number of units to be sold next year under current situation is as under: Number of units: Target contribution / CM per unit (505000+250000) / 5 = 153000 units