Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution

Cornerstones of Cost Management (Cornerstones Series)
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Chapter2: Basic Cost Management Concepts
Section: Chapter Questions
Problem 21E: Ellerson Company provided the following information for the last calendar year: During the year,...
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Pharoah Corporation has collected the following information after its first year
of sales. Sales were $1,350,000 on 90,000 units; selling expenses $225,000
(40% variable and 60% fixed); direct materials $459,900; direct labor $261,000;
administrative expenses $243,000 (20% variable and 80% fixed); and
manufacturing overhead $315,000 (70% variable and 30% fixed). Top
management has asked you to do a CVP analysis so that it can make plans for
the coming year. It has projected that unit sales will increase by 10% next year.
The company is considering a purchase of equipment that would reduce its
direct labor costs by $93,600 and would change its manufacturing overhead
costs to 30% variable and 70% fixed (assume total manufacturing overhead
cost is $315,000, as above). It is also considering switching to a pure
commission basis for its sales staff. This would change selling expenses to 90%
variable and 10% fixed (assume total selling expense is $225,000, as above).
Compute (1) the contribution margin and (2) the contribution margin ratio, and
recompute (3) the break-even point in sales dollars. (Round contribution
margin ratio to 2 decimal places, e.g. 0.25 and all other answersto O decimal
places, e.g. 2,520. Use the current year numbersfor calculations.)
Transcribed Image Text:Pharoah Corporation has collected the following information after its first year of sales. Sales were $1,350,000 on 90,000 units; selling expenses $225,000 (40% variable and 60% fixed); direct materials $459,900; direct labor $261,000; administrative expenses $243,000 (20% variable and 80% fixed); and manufacturing overhead $315,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year. The company is considering a purchase of equipment that would reduce its direct labor costs by $93,600 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $315,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $225,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 0.25 and all other answersto O decimal places, e.g. 2,520. Use the current year numbersfor calculations.)
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