Buggs-Off Corporation produces and sells a line of mosquito repellants that are sold usually all year round. The product sells at $100 per box. The following cost data has been prepared for its estimated upper and lower limits of activity for the year ended December 31, 2020. Lower Limit Upper Limit Production (# of boxes) 4,000 6,000 Production Costs: Direct Materials …………………… $60,000 $90,000 Direct Labour ………………………. 80,000 120,000 Overhead: Indirect Materials…………... 25,000 37,500 Indirect Labour ……………. 40,000 50,000 Depreciation ………………. 20,000 20,000 Selling & Administrative Expenses: Sales Salaries ………………… 50,000 65,000 Office Salaries ………………… 30,000 30,000 Advertising …………………………45,000 45,000 Other …………………………… 15,000 20,000 Total $365,000 $477,500 d) Assuming sales of 5,000 units, calculate Buggs-Off break-even point and margin of safety in units and sales dollars. e) Recompute the break-even point in units, assuming that variable costs increased by 20% and fixed costs are reduced by $50,625. How will this impact the margin of safety ratio? (f) The President of Buggs-Off is under pressure from shareholders to increase operating income by 20% in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the equation method, compute the number of units that would have to be sold in 2021 to reach the shareholders desired profit level. Is this a realistic goal? (g) Briefly explain the impact of each of the following scenarios on the contribution margin per unit and the break-even point: (i) Sales volume increases (ii) Total fixed cost decreases (iii) Selling price per unit increases (iv) Variable cost per unit increases
Buggs-Off Corporation produces and sells a line of mosquito repellants that are sold usually all year round. The product sells at $100 per box. The following cost data has been prepared for its estimated upper and lower limits of activity for the year ended December 31, 2020.
Lower Limit Upper Limit
Production (# of boxes) 4,000 6,000
Production Costs:
Direct Materials …………………… $60,000 $90,000
Direct Labour ………………………. 80,000 120,000
Overhead: Indirect Materials…………... 25,000 37,500
Indirect Labour ……………. 40,000 50,000
Selling & Administrative Expenses:
Sales Salaries ………………… 50,000 65,000
Office Salaries ………………… 30,000 30,000
Advertising …………………………45,000 45,000
Other …………………………… 15,000 20,000
Total $365,000 $477,500
d) Assuming sales of 5,000 units, calculate Buggs-Off break-even point and margin of safety in units and sales dollars.
e) Recompute the break-even point in units, assuming that variable costs increased by 20% and fixed costs are reduced by $50,625. How will this impact the margin of safety ratio?
(f) The President of Buggs-Off is under pressure from shareholders to increase operating income by 20% in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the equation method, compute the number of units that would have to be sold in 2021 to reach the shareholders desired profit level. Is this a realistic goal?
(g) Briefly explain the impact of each of the following scenarios on the contribution margin per unit and the break-even point:
(i) Sales volume increases
(ii) Total fixed cost decreases
(iii) Selling price per unit increases
(iv) Variable cost per unit increases
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