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Jorge Company bottles and distributes B-Lite, a diet soft drink
Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers. For the year 2022, management estimates the following revenues and costs.
Sales$1,800,000 Selling expenses—variable$70,000Direct materials430,000 Selling expenses—fixed65,000Direct labor360,000 Administrative expenses—variable20,000Manufacturing overhead—variable380,000 Administrative expenses—fixed60,000Manufacturing overhead—fixed280,000
Instructions
- Prepare a CVP income statement for 2022 based on management's estimates. (Show column for total amounts only.)
- Compute the break-even point in (1) units and (2) dollars.
- b. (1) 2,700,000 units
- Compute the contribution margin ratio and the margin of safety ratio. (Round to nearest full percent.)
- c. CM ratio 30%
- Determine the sales dollars required to earn net income of $180,000.
Compute break-even point under alternative courses of action.
Expert Solution
b) Computation of Break-even Point in (1) units and (2) dollars:
1.Break-even Point in Units = Fixed Cost / Contribution Margin per Unit
Here,
Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit
= $0.50 - ($1,260,000/($1,800,000/$0.50))
= $0.50 - $0.35
Contribution Margin per Unit = $0.15 per unit
Break-even Point in Units = $405,000/$0.15 = 2,700,000 units
2. Break-even Point in Dollars = 2,700,000 units*$0.5 = $1,350,000
c) Computation of Contribution Margin Ratio and the Margin of Safety Ratio:
Contribution Margin Ratio = Contribution Margin per Unit / Sales Price per Unit
= $0.15/$0.50
Contribution Margin Ratio = 30%
Margin of Safety Ratio = Margin of Safety in Dollars / Total Sales
Here,
Margin of Safety in Dollars = Actual Sales - Break-even Sales = $1,800,000-$1,350,000 = $450,000
Margin of Safety Ratio = $450,000/$1,800,000 = 25%
d) Computation of Sales Dollars required to Earn net income of $180,000:
Required Sales = (Fixed Cost+Target Profit)/Contribution Margin Ratio
= ($405,000+$180,000)/30%
= $585,000/30%
Required Sales = $1,950,000
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