question archive ABC Company Projected Income Statement For the Current Year Ending December 31 Sales (4,000 units) $400,000 Less variable costs: Variable manufacturing costs $100,000 Variable selling costs 60,000 Total variable costs 160,000 Contribution margin $240,000 Less fixed costs: Fixed manufacturing costs $120,000 Fixed selling and administrative costs 60,000 Total fixed costs 180,000 Operating income $ 60,000 Required: A
ABC Company Projected Income Statement For the Current Year Ending December 31 Sales (4,000 units) $400,000 Less variable costs: Variable manufacturing costs $100,000 Variable selling costs 60,000 Total variable costs 160,000 Contribution margin $240,000 Less fixed costs: Fixed manufacturing costs $120,000 Fixed selling and administrative costs 60,000 Total fixed costs 180,000 Operating income $ 60,000 Required: A
Subject:FinancePrice:4.87 Bought7
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ABC Company Projected Income Statement For the Current Year Ending December 31 |
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Sales (4,000 units) |
$400,000 |
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Less variable costs: |
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Variable manufacturing costs |
$100,000 |
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Variable selling costs |
60,000 |
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Total variable costs |
160,000 |
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Contribution margin |
$240,000 |
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Less fixed costs: |
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Fixed manufacturing costs |
$120,000 |
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Fixed selling and administrative costs |
60,000 |
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Total fixed costs |
180,000 |
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Operating income |
$ 60,000 |
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Required:
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A. |
Determine the break-even point in sales dollars. |
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B. |
The sales manager believed the company could increase sales by 1,000 units if advertising expenditures were increased by $25,000. By how much will operating income increase or decrease if the advertising is increased as suggested? |
2.
XYZ plans to sell 10,000 units of finished product at $100 each in the coming year. Variable cost per unit is $75 and total fixed cost is $20,000.
Required:
A.) Calculate the variable cost ratio.
B.) Calculate the contribution margin ratio.
C.) Calculate the break-even point in sales dollars.
D.) If XYZ has a target profit of $100,000, how many units will they have to sell?
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Answer:
A. Calculation of break-even point in sales dollars
Break-even point in sales dollars = Fixed Cost / Contribution Margin Ratio
= $ 1,80,000 / 60 %
= $ 3,00,000
Contribution margin ratio = Contribution Margin / Total Sales *100
= $ 2,40,000 / $ 4,00,000 * 100
= 60%
B.
Increase (Decrease) in net operating income = (Increase in sales * Contribution margin ratio) - Increase in advertising budget
= ( $1,00,000 * 60% ) - $25,000
= $ 35,000
If Advertising expenditure increased by $ 25000 then it will result in increase in net operating income by $ 35,000
Increase in sales = 1000 Units * $ 100 per Unit
= $ 1,00,000
2.
Income Statement
| Sr.No | Total | Per Unit | |
| (i) | Sales ( Units 10,000 ) | $10,00,000 | $ 100 |
| (ii) | Variable Costs | $ 7,50,000 | $ 75 |
| (iii) | Contribution Margin (i) - (ii) | $ 2,50,000 | $ 25 |
| (iv) | Fixed Costs | $ 20,000 | |
| (v) | Net Income/(Loss) (iii)-(iv) | $ 2,30,000 |
2.A. Calculation of variable cost ratio :
variable cost ratio = Variable Cost per unit / Selling price per unit *100
= $ 75 / $ 100 * 100
= 75 %
Therefore variable cost ratio is 75%
2.B. Calculation of contribution margin ratio :
Contribution margin ratio = Contribution Margin per unit / Selling price per unit *100
= $ 25 / $ 100 * 100
= 25%
Therefore Contribution margin ratio is 25%.
Contribution margin per Unit = Total Contribution / Sales Units
= $2,50,000 / 10,000
= $ 25 per unit
2.C. Calculation of break-even point in sales dollars :
Break-even point in sales dollars = Fixed Cost / Contribution Margin Ratio
= $ 20,000 / 25 %
= $ 80,000
Therefore break-even point is $ 80,0000.
2.D. Calculation of Sales Units need to sell when Profit of $ 1,00,000 :
Fixed cost will remain same i.e $ 20,000
Therefore we can easily calculate Contribution Margin
Total Contribution Margin = Fixed Cost + Profit
= $ 20,000 + $ 1,00,000
= $ 1,20,000
Contribution margin $ 25 ( as per 2.B )
Sales (in Units ) = Total Contribution Margin / Contribution Margin Per unit
= $ 1,20,000 / $ 25
= 4,800 Units
Therefore Sales of 4,800 Units required in order to earn profit of $1,00,000
