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Homework answers / question archive / Emerald, Inc, produces a single product

Emerald, Inc, produces a single product

Accounting

Emerald, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:

 

Sales $540,000

Variable expenses 360,000

Contribution margin 180,000

Fixed expenses 120,000

Net operating income $ 60,000

 

The company produced and sold 120,000 kilograms of product during the month. There was no beginning or ending inventories.

 

Required:

a. Given the present situation, compute

1) The break-even sales in kilograms.

2) The break-even sales in dollars.

3) The sales in kilograms that would be required to produce net operating income of $90,000.

4) The margin of safety in dollars.

 

b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. The company has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.

1) Should the company choose the lease or the royalty plan?

2) Under the royalty plan compute break-even point in kilograms.

3) Under the royalty plan compute break-even point in dollars.

4) Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.

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a -1)

Sales price per unit = Total sales / Total units

= $540000 / 120000 kilograms

= $4.50 per kg

 

Variable cost per unit = Total variable expenses/ Total units

= $360000 / 120000 kilograms

= $3.00 per kg

 

Contribution margin per unit = Sales price per unit - Variable cost per unit

= $4.50 per kg - $3.00 per kg

= $1.50 per kg

 

Calculating Break even sales in kilograms:

Break even sales (kilograms) = Fixed expenses / Contribution margin per kg

= $120000 / $1.50 per kg

= 80000 kilograms

 

a - 2)

Calculating break even sales in dollars:

Break even sales (dollars) = Break even sales (kilograms ) x Sales price per kg

= 80000 kilograms x $4.50 per kg

= $360000

 

a- 3)

Calculating required sales to earn target net operating income:

Required sales = (Fixed expenses + Target net operating income) / Contribution margin per kg

= ($120000 + $90000 )/ $1.50 per kg

= $210000 / $1.50 per kg

= 140000 kilograms

 

a- 4)

Calculating margin of safety:

Margin of safety = Sales - Break even sales in dollars

= $540000 - $360000

= $180000

 

b- 1)

New variable cost per unit = Original variable cost per unit + Royalty cost per unit

= $3.00 per kg + $0.10 per kg

= $3.10 per kg

 

Total new variable expenses = No. of units x New variable cost per unit

= 120000 kilograms x $3.10 per kg

= $372000

 

New fixed expenses = Original fixed expense - Decrease in monthly lease

= $120000 - $20000

= $100000

(ATTACHED FILE DATA AFTER THIS)

The net operating income increases by $8000 ($68000 - $60000) under the royalty plan. It implies royalty is a good plan provided sales remains at the same level of 120000 kilograms.

 

b - 2)

Calculating Break even point in kilograms:

Break even point (kilograms) = Fixed expenses / Contribution margin per kg

= $100000 / $1.40 per kg

= 71429 kilograms

 

b - 3)

Calculating break even point in dollars:

Break even point (dollars) = Break even point (kilograms ) x Sales price per kg

= 71429 kilograms x $4.50 per kg

= $321429

 

Answer: b-4)

Calculating required sales to earn target net operating income:

Required sales = (Fixed expenses + Target net operating income) / Contribution margin per kg

= ($100000 + $90000 )/ $1.40 per kg

= $190000 / $1.40 per kg

= 135714 kilograms

 

 

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