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Chapter 20: Q3TI (page 1102)

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. The company desires to earn an operating profit of \)12,000 per month.

10. Calculate the required sales in units to earn the target profit using the equation method.

11. Calculate the required sales in units to earn the target profit using the contribution margin method.

12. Calculate the required sales in dollars to earn the target profit using the contribution margin ratio method.

13. Calculate the required sales in units to break even using the contribution margin method.

Short Answer

Expert verified
  1. Units sold = 300
  2. Units sold = 300
  3. Required sales in dollars =$26,000
  4. Units sold = 300

Step by step solution

01

Calculation of the required sales in units to earn the target profit using the equation method

Target profit = Net sales revenue 鈥� Variable costs 鈥� Fixed costs

$12,000 = ($100 x Units sold) 鈥� ($40 x Units sold) - $6,000

$12,000 - $6,000 =$60 x Units sold

Units sold = 300 Units

02

Calculation of the required sales in units to earn the target profit using the contribution margin method.

Contribution Margin Per Unit = Sale Price-Variable Cost

=$100-$40

=$60

Required sales in units = Fixed costs + Target profit/ Contribution margin per unit

=($6,000+$12,000)/$60

=300 Units

03

Calculation of the required sales in dollars to earn the target profit using the contribution margin ratio method

Contribution margin ratio = Contribution Margin Per Unit/ Sale price per unit

=$60/$100

=60%

Required sales in dollars =Fixed costs + Target profit/ Contribution margin ratio

=($6,000+$12,000)/60%

=$30,000

04

Calculation of the required sales in units to break even using the contribution margin method. 

Required sales in units =Fixed costs + Target profit/Contribution margin per unit

=($6,000+$12,000)/$60

=300 units

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Most popular questions from this chapter

What is a fixed cost? Give an example.

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel鈥檚 $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.

Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?

4. After considering all the factors, should you inform Barnhill or simply keep quiet?

A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to Store #36 located in Atlanta, Georgia, is the manager鈥檚 salary fixed or variable? Why?

Question: Determining total variable cost

For each variable cost per unit listed below, determine the total variable cost when units produced and sold are 25, 50, and 100 units.

Direct materials $ 40

Direct labor 80

Variable overhead 9

Sales commission 12

Calculating contribution margin

Glenn Company sells a product for \(80 per unit. Variable costs are \)60 per unit, and fixed costs are $800 per month. The company expects to sell 560 units in September. Calculate the contribution margin per unit, in total, and as a ratio.
See all solutions

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