Viejol Corporation has collected the following information after its first year of sales. Sales were $1,440,000 on 120,000 units, selling expenses $210,000 (40% variable and 60% fixed), direct materials $504,000, direct labor $169,400, administrative expenses $276,000 (20% variable and 80% fixed), and manufacturing overhead $382,000 (70% variable and 30% fixed. Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year. (a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)
(b) Compute the break-even point in units and sales dollars for the current year.
(c) The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target?

a. (1). 25 % and 25 %

a. (2). $461,400

b. 153,800 units

c. $1,845,600

d. $2,645,600

Explanation:

Contribution margin = Contribution / Sales × 100

Where

Contribution margin = Sales - Variable Cost

Current

Sales                                                                $1,440,000

Variable Costs :

Selling expenses                        $84,000

Direct materials                        $504,000

Direct labor                                $169,400

Administrative expenses           $55,200

Manufacturing Overheads       $267,400    ($1,080,000)

Contribution                                                      $360,000

Contribution margin =  $360,000 / $1,440,000 × 100

                                 = 25 %

Projected

Sales ( $12 × 120,000 × 1.10)                                                     $1,584,000

Variable Costs :

Selling expenses  ($84,000/120,000 × 132,000)                     ($92,400)

Direct materials ($504,000/120,000 × 132,000)                    ($554,400)

Direct labor ($169,400/120,000 × 132,000)                             ($186,340)

Administrative expenses ($55,200/120,000 × 132,000)         ($60,720)

Manufacturing Overheads ($267,400/120,000 × 132,000)    ($294,140)

Contribution                                                                                $396,000

Contribution margin =  $396,000 / $1,584,000 × 100

                                 =   25 %

Fixed Costs Calculation :

Selling expenses      ($210,000 × 60%)                $126,000

Administrative expenses  ($276,000 × 80%)      $220,800

Manufacturing Overheads   ($382,000 × 30%)    $114,600

Total Fixed Cost                                                     $461,400

Break Even Point (Units) = Fixed Costs ÷ Contribution per unit

                                        = $461,400 ÷ ($360,000 ÷ 120,000)

                                        = 153,800 units

Break Even Point (Dollars) = Fixed Cost ÷ Contribution Margin

                                            = $461,400 ÷ 0.25

                                            = $1,845,600

Sales to Reached Target Profit = (Fixed Cost + Target Profit) ÷ Contribution Margin

                                                     = ($461,400 + $200,000) ÷ 0.25

                                                     = $2,645,600

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