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Wesley Company manufactures and sells a single product
Wesley Company manufactures and sells a single product. The company's income statement at sales level of 30,000 units for last quarter follows:
TotalSales$300,000 Less: Variable expenses 180,000 Contribution margin 120,000 Less: Fixed expenses 56,000 Net operating income$64,000
Required:
1. What is the monthly break-even point in units sold and in sales dollars? (Round your intermediate calculations and final answers to the nearest whole number.)
2. Without resorting to computations, calculate the total contribution margin at the break-even point for the quarter.
3-a. How many units would have to be sold each quarter to earn a target profit of $14,400? Use the formula method.
3-b. Verify your answer by preparing a contribution format income statement at the target level of sales.
4. Refer to the original data. Compute the company's margin of safety for the quarter in units, in dollars and as a percentage of last quarter's sales. (Round "Percentage" answer to 1 decimal place, (i.e., 0.123 should be considered as 12.3%).)
5. What is the company's CM ratio? If quarterly sales decrease by $12,000 and there is no change in fixed expenses, what would you expect the quarter's net operating income to be? ( an income statement; use the CM ratio to compute your answer.)
Expert Solution
1)
Selling Price per unit = $300,000/30,000 units = $10.00
Variable Cost per unit = $180,000/30,000 = $6
Contribution Margin per Unit = $10 - $6 = $4
Fixed Costs = $56,000
Breakeven Point in unit sales = Fixed Costs / Contribution Margin per unit
= $56,000 / $4.00
= 14,000
Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per unit
= 14,000 * $10.00
= $140,000
2)
At breakeven level, total contribution margin is equal to the fixed costs i.e., $56,000
3-a)
Required unit sales = (Fixed Costs + Targeted Profit) / Contribution Margin per unit
= ($56,000 + $14,400) / $4.00
= 17,600 units
4)
Margin of Safety = Actual Sales - Breakeven Sales
= $300,000 - $140,000
= $160,000
Margin of Safety Ratio = Margin of Safety / Actual Sales
= $160,000 / $300,000
= 53.33%
5)
Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
= $4.00 / $10.00
= 40%
Increase in Net Operating Income = Decrease in Sales * Contribution Margin Ratio
= $12,000 * 40%
= -$4,800
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