Reference no: EM132521773

Calculate the contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio, and prepare one CVP income statement before and after changes in the business environment.

• (LO 1, 2, 3, 4) Poole Corporation has collected the following information after its first year of sales. Net sales were $1.6 million on 100,000 units, selling expenses were $240,000 (40% variable and 60% fixed), direct materials were $511,000, direct labour was $285,000, administrative expenses were $280,000 (20% variable and 80% fixed), and manufacturing overhead was $360,000 (70% variable and 30% fixed). Top management has asked you to do one CVP analysis so that it can make plans for the coming year. Management has projected that unit sales will increase by 10% next year. Assume no change in the price of the units.

Instructions

Question a. Calculate (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.)

CM (current year) = $400,000

Question b. Calculate the break-even point in units and sales dollars for the first year.

Question c. The company has a target operating income of $310,000. Calculate the required sales amount in dollars for the company to meet its target.

Question d. Assuming the company meets its target operating income number, calculate by what percentage its sales could fall before the company operates at a loss. That is, what is its margin of safety ratio?

Question e. The company is considering a purchase of equipment that would reduce its direct labour costs by $104,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed. (Assume the total manufacturing overhead cost is $360,000, as above.) It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed. (Assume the total selling expense are $240,000, as above). Assume no change in the volume or price of the units) Calculate (1) the contribution margin and (2) the contribution margin ratio, and (3) recalculate the break-even point in sales dollars. Comment on the effect each of management's proposed changes has on the break-even point.