Reference no: EM133144648

Question - Corona Corporation has collected the following information after its first year of sales. Net sales were $2 million on 100,000 units, selling expenses were $400,000 (30% variable and 70% fixed), direct materials were $600,000, direct labor was $340,000, administrative expenses were $500,000 (30% variable and 70% fixed), and manufacturing overhead was $480,000 (20% variable and 80% fixed). Top managers have asked a CVP analysis so that they can make plans for the coming year. They have projected that sales will increase by 20% next year. Assume no change in the price of the units.

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.)

b. Calculate the break-even point in units and sales dollars.

c. The company has a target operating income of $474,000. Calculate the required sales amount in dollars for the company to meet its target.

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

e. The company is considering buying equipment that would reduce its direct labor costs by $140,000 and would change its manufacturing overhead costs to 10% variable and 90% fixed. (Assume the total manufacturing overhead cost is $480,000, as above. Assume no change in the volume or price of the units.) It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 80% variable and 20% fixed. (Assume the total selling expenses are $400,000, as above.) 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.