Poole Corporation has collected the following information after its first year of sales. Net sales were $1,600,000 on 100,000 units; selling expenses $250,000 (35% variable and 65% fixed); direct materials $511,000; direct labor $285,000; administrative expenses $280,000 (30% variable and 70% fixed); manufacturing overhead $380,000 (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. Required (a) Compute 1) the contribution margin for the current year and the projected year, and 2) the fixed costs for the current year. (b) Compute the break-even point in units and sales dollars for the current year. (c) The company has a target net income of $310,000. What is the required sales in dollars for the company to meet its target?
Poole Corporation has collected the following information after its first year of sales.
Net sales were $1,600,000 on 100,000 units; selling expenses $250,000 (35% variable and 65% fixed); direct materials $511,000; direct labor $285,000; administrative expenses $280,000 (30% variable and 70% fixed); manufacturing
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.
Required
(a) Compute
1) the contribution margin for the current year and the projected year, and
2) the fixed costs for the current year.
(b) Compute the break-even point in units and sales dollars for the current year.
(c) The company has a target net income of $310,000. What is the required sales in dollars for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?
(e) The company is considering a purchase of equipment that would reduce its direct labor
costs by $105,000 and would change its
70% fixed (assume total manufacturing overhead cost, 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. Assuming that net sales remain at first-year levels, compute:
(1) the contribution margin and
(2) the contribution margin ratio, and recomputed
(3) the break-even point in sales dollars.
(4) Comment on the effect each of management’s proposed changes has on the break-even
point.
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