Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Emerald, Inc, produces a single product
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.
Expert Solution
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
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
