Spanish Manufacturing Company produces and sells a line of products that are sold usually all year round. The The company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the The business earned an Operating Income of $600,000 in 2020. The following cost data has been prepared for the The year ended December 31, 2020. Selling price per unit……………………………………… $50.00 Production Costs: Direct Materials …………………………………. $10.00 Direct Labor ……………………………………. $8.00 Variable Manufacturing Overhead ……………. $7.00 Fixed Manufacturing Overhead…………....................... $450,000 Fixed Selling & Administrative Expenses……………… $300,000 Variable selling expense per unit ………………………. $10.00 Required: Using the equation method, calculate the normal capacity of the business. Assuming sales are equal to the normal capacity calculated in a) above, prepare a contribution margin income statement for the year ended December 31, 2020, detailing the components of total variable costs and total fixed costs, and clearly showing contribution and net income. The recession in the economy in 2021 is expected to result in a reduction of the number of units sold. Assuming that Spanish is operating at normal capacity, by how much can sales decline in units and sales dollars in 2021 without the company making a loss?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Spanish Manufacturing Company produces and sells a line of products that are sold usually all year round. The

The company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the

The business earned an Operating Income of $600,000 in 2020. The following cost data has been prepared for the

The year ended December 31, 2020.

Selling price per unit……………………………………… $50.00

Production Costs:

Direct Materials …………………………………. $10.00

Direct Labor ……………………………………. $8.00

Variable Manufacturing Overhead ……………. $7.00

Fixed Manufacturing Overhead…………....................... $450,000

Fixed Selling & Administrative Expenses……………… $300,000

Variable selling expense per unit ………………………. $10.00

Required:

Using the equation method, calculate the normal capacity of the business.
Assuming sales are equal to the normal capacity calculated in a) above, prepare a contribution margin income statement for the year ended December 31, 2020, detailing the components of total variable costs and total fixed costs, and clearly showing contribution and net income.
The recession in the economy in 2021 is expected to result in a reduction of the number of units sold. Assuming that Spanish is operating at normal capacity, by how much can sales decline in units and sales dollars in 2021 without the company making a loss?

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