1 Use this contribution income statement to complete the fol

1. Use this contribution income statement to complete the following questions: $1,200,000 Sales (100,000 units) Variable costs Cost of goods sold Selling and administrative $420,000 200,000 (620,000) 580,000 Contribution margin Fixed costs 205,000 Manufacturing overhead Selling and administrative 80,000 (285,000) 295,000 (106,200) $188,800 Before-tax profit Income taxes (36%) After-tax profit Determine the annual break-even point in sales dollars. Selling price per unit 1,200,000/100,000-$12 Variable cost per units 620,000/100,000=$6.20 a. $285,000$12.00-$6.20)-$49,137 Determine the annual margin of safety in sales dollars.| (1,200,000-49,137)/1,200,000-.96 b. c. Prepare a cost-volume-profit graph for this company. Label the horizontal axis in units with a maximum value of 100,000 units. Label the vertical axis in dollars with a maximum value of $1,200,000. Label the breakeven point, and identify the total fixed costs, total variable costs, and profit at 100,000 units. d. What is the break-even point in units if management makes a decision that increases manufacturing overhead fixed costs by $57,000? Prepare an abbreviated contribution income statement to verify that the solution to requirement (d) will break even (that is, prepare a new contribution income statement with the breakeven number of units and fixed costs indicated in part (d), which should show $0 in net income. e.

Solution

a. Annual break-even point sales in dollars Break-even point = Total fixed costs / Contrubiton margin                                      = 285,000 / 48.33% $589,695 (rounded) b.Margin of safety Actual sales 1200000 Break-even sales 589695 Margin of safety (1,200,000- 589,695) 610305 d. Break-even point in units: Unit selling price (1,200,000 / 100,000) 12.00 Units variable cost (620,000 / 100,000) 6.20 Contribution margin (12.00 - 6.20) 5.80 Present fixed cost 285000 Addition to fixed costs 57000 Revised fixed cost 342000 Break-even point in units = Fixed costs / unit contribution margin                                                  =342,000/5.80 58966 units e. Verification of the above break even point Sales (58,966 units @$12.00 per unit ) 707592 Variable costs (58,966 units @$6.20) 365589 Contribution margin 342003 48.33% Fixed costs    Manufacturing overhead 262000    Selling and administrative overhead 80000 Total fixed costs 342000 Before - tax profit 2.8 The difference is due to rounding off of break even point