1 answer

This year Burchard Company sold 27,000 units of its only product for $19.60 per unit. Manufacturing...

Question:

This year Burchard Company sold 27,000 units of its only product for $19.60 per unit. Manufacturing and selling the product required $112,000 of fixed manufacturing costs and $172,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Material $ 3.20
Direct labor (paid on the basis of completed units) 2.20
Variable overhead costs 0.32
Variable selling and administrative costs 0.12

Next year the company will use new material, which will reduce material costs by 60% and direct labor costs by 40% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 32,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 25%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Please help with this 2 part question

Required:

1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. (Round "per unit answers" and "CM ratio" percentage answer to 2 decimal places.)

2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (40% rate), and net income.


Answers

Solution 1:

Computation of Breakeven Point in dollar sales - Burchard Company
Particulars Plan A Plan B
Selling price per unit $19.60 $24.50
Variable cost per unit:
Direct material ($3.20*40%) $1.28 $1.28
Direct labor ($2.20*60%) $1.32 $1.32
Variable overhead $0.32 $0.32
Variable selling and administrative cost $0.12 $0.12
Total variable cost per unit $3.04 $3.04
Contribution margin per unit $16.56 $21.46
Contribution margin ratio 84.49% 87.59%
Fixed costs $284,000 $284,000
Breakeven sales (Fixed costs/ CM ratio) $336,134 $324,238

Solution 2:

Burchard Company
Forecasted Contribution margin income statement
Particulars Plan 1 Plan 2
Nos of units 27000 24300
Sales $529,200 $595,350
Variable cost $82,080 $73,872
Contribution Margin $447,120 $521,478
Fixed Manufacturing Cost $112,000 $112,000
Fixed Selling & Administrative Cost $172,000 $172,000
Income before taxes $163,120 $237,478
Income Tax (40%) $65,248 $94,991
Net Income $97,872 $142,487
.

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