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?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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.

                                                                             Lowe Limit    Upper Limited

 

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?                                                    

 

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