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The car company manufactures and sells Waxworks car polish
The car company manufactures and sells Waxworks car polish. This expensive polish is priced at $20 per can (applicator sponge included). Car Company's costs are: Fixed costs (per month) Variable Costs per can Manufacturing $500000 Manufacturing $11 Selling costs 292000 Selling 3
1. Find the monthly breakeven quantity using the above data.
2. How many cans must be sold to earn $60000 per month above breakeven (before taxes)? 3. What is the Contribution Margin Ratio (CMR), using the costs in (#2)? 4. If variable selling costs increase from $3 to 20% more per can, what is the new break even quantity, assuming $60000 per month before taxes is to be earned?
5. Assuming a 40% tax rate, how many cans must be sold to eam an after-tax income of $90000 above breakeven assume variable selling costs per can increase from $3 to 20% more per can (as they did in #4 above)? Hint: The before- tax income that yields an after-tax income of $90000 must be .6X = $90000. Thus X = $$$ before-tax and this can be added to the $792000 of fixed costs.
6. What is the DOL in (#4) above?
Expert Solution
1) Computation of Monthly Breakeven Quantity:
Breakeven Quantity = Total Fixed Costs/Contribution Margin per Unit
Here,
Total Fixed Cost = Manufacturing + Selling Costs = $500,000+$292,000 = $792,000
Contribution Margin per Unit = Selling price - Variable costs = $20 - ($11 + $3) = $6
Breakeven Quantity = $792000/$6 = 132000 cans
2) Computation of Required Number of Cans Sold:
Required Number of Cans to be Sold = (Total Fixed Costs + Target Income)/Contribution Margin per Unit
= ($792000 + $60000)/$6
= $852000/$6
Required Number of Cans to be Sold = 142000 cans
3) Computation of Contribution Margin Ratio:
Contribution Margin Ratio = Contribution Margin/Sales
= $6/$20
= 30%
4) Computation of Breakeven Quantity:
Breakeven quantity = Total Fixed Costs/Contribution Margin per Unit
Here,
Contribution per unit = Selling price - Variable costs = $20 - [1.20 * ($11 + $3)] = $20 - $16.80 = $3.20
Breakeven Quantity = = ($500000 + $292000)/$3.20
= $792000/$3.20
= 247500 cans
Number of cans to be sold = (Total fixed costs + Target income)/Contribution per unit
= ($792000 + $60000)/$3.20
= $852000/$3.20
= 266250 cans
5) Computation of Number of Cans to be Sold:
Required Number of Cans to be Sold = (Total Fixed Costs + Target Income)/Contribution Margin per Unit
= ($792000 + $150,000)/$3.20
= $942,000/$3.20
Required Number of Cans to be Sold = 294,375 cans
Note:
Target income = Net income/(1 - Tax rate) = $90000/(1 - 0.40) = $90000/0.60 = $150000
Computation of DOL:
DOL = Contribution Margin/Net Operating Income
= (266250 * $3.20)/$90000
= $852000/$90000
DOL = 9.47
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