Reference no: EM13579916

The Salazar Corporation manufactures only one product - a medium-size, high-quality paper shredder called the MS-100. In an effort to better understand cost behavior, Salazar's accounting department has identified its costs as either variable or fixed. Salazar's Management wants to perform Cost-Volume-Profit (CVP) analysis to evaluate three different scenarios it is considering for the year 2012. Under the current production process (Scenario 1), variable costs are $ 90 per unit and fixed costs are $ 420,000 per year. The sales price for the MS-100 is $150 per unit and the number of units to be sold in 2012 is 20,000 units. Scenarios 1. Leave the current production process as it is - make no changes. a. Variable : $90 per unit b. Fixed : $420,000 per year c. Sales : $150 per unit d. Units sold in 2012 : 20,000 2. Purchase machinery that will decrease variable costs by $ 30 per unit will but increase yearly fixed costs by $ 390,000 a. Variable : $60 b. Fixed : $810,000 3. Purchase machinery that will decrease variable costs by $ 15 per unit but will increase yearly fixed costs by $ 255,000. a. Variable : $75 b. Fixed : $645,000 Requirements: a) Calculate the contribution margin per unit and the contribution margin ratio for each

ontribution Margin Ratio = (Contribution Margin per unit/ Sales price per unit) i. (Scenario 1) ? Contribution Margin = $150 - $90 = $60 Contribution Margin per Unit ; Contribution Margin Ratio = ($60/$150) = 0.4 = 40% Contribution Margin Ratio ii. (Scenario 2) ? Contribution Margin = $150 - $60 = $90 Contribution Margin per Unit ; Contribution Margin Ratio = ($90/$150) = 0.6 = 60% Contribution Margin per Unit iii. (Scenario 3) ? Contribution Margin = $150-$75 = $75 Contribution Margin per Unit ; Contribution Margin Ration = ($75/$150) = 0.5 = 50% Contribution Margin Ratio b) Calculate the breakeven point in units and dollars - only for Scenario I, the current production process. Show your calculations. a. Break-Even Point in Units = (Fixed Costs/Contribution Margin per Unit); Break-Even Point in Dollars = (Fixed Costs/ Contribution Margin Ratio) i. (Scenario 1) ? Break-Even Point in Units = ($420,000/$60) = $7,000 Break-Even point in Units ; Break-Even Point in Dollars = ($420,000/.4) = $1,050,000 Break-Even Point in Dollars c) Prepare a contribution margin income statement for each of the three scenarios. Scenario 1 Salazar Corporation Contribution Margin Income Statement For Year Ended 2012 Sales $ 3,000,000 Variable Costs $ 1,800,000 Contribution Margin $ 1,200,000 Fixed Costs $ 420,000 Net Income $ 780,000 d) Scenario 2 Salazar Corporation Contribution Margin Income Statement For Year Ended 2012 Sales $ 3,000,000 Variable Costs $ 1,200,000 Contribution Margin $ 1,800,000 Fixed Costs $ 810,000 Net Income $ 990,000 e) Scenario 3 Salazar Corporation Contribution Margin Income Statement For

Year Ended 2012 Sales $ 3,000,000 Variable Costs $ 1,500,000 Contribution Margin $ 1,500,000 Fixed Costs $ 645,000 Net Income $ 855,000 f) Which of the three scenarios provides the highest net income for the Salazar Company? i. Scenario 2 will provide the most with a Net Income of $990,000. Salazar's management subsequently makes a decision that the company must make $ 918,000 of after-tax net income in 2012, otherwise certain investors might decide to sell their ownership interest. g) Calculate the sales that Salazar must make in order to produce an after-tax net income of $ 918,000 (both in total sales dollars and in total sales units). This calculation should be based on the scenario in d) that provides that highest net income. Salazar's income tax rate is 20%. Show your calculations. a. Dollar Sales at Target After-Tax Income = (Fixed Costs+Target Pretax income)/(Contribution Margin Ratio) i. After-Tax Net Income: $918,000 ; Fixed: $810,000 ;

CMR: 60%, Net Income: $990,000. ii. Pretax Income = After-Tax Income/(1-Tax Rate) = 918,000/(1-20%) = $2,295,000 Pretax Income iii. Dollar Sales at Target After-Tax Income=(810,000+2,295,000)/60% =$5,175,000 Dollar Sales at Target After-Tax Income iv. Unit Sales after Target Tax Income = (Fixed Cost +Target Pretax Income)/ Contribution Margin per unit) = (810,000+2,295,000)/$90 = $34,500 Unit Sales after Target Tax Income. h) Prepare a forecasted contribution margin income statement that shows the results for the sales level computed in part f) above. Scenario 2 Salazer Contribution Margin Income Statement Ending of Year 2012 Sales $ 3,000,000 Variable Costs $ 1,200,000 Contribution Margin $ 1,800,000 Fixed Costs $ 810,000 Pretax Income $ 990,000 Income taxes (20%) $ 198,000 Net Income (After Tax) $ 792,000