Question

Question 2: Jake Co. makes dog collars Jake Co believes they will sell 12.500 dog collars this year and have revenue on $56,250, total variable costs of $15,625 and total fixed costs of $32,825. With this information please find: a. Jake Co.'s target operating income: b. Jake Co.'s break even units: C. Jake Co.'s margin of safety:

Answer 1

Answer-2:

(a) Target operating income = Expected sales - variable cost – Fixed costs

                                            = $56,250 – 15,625 – 32,825 = $7,800

(b) Sales per unit = $56,250 / 12,500 =$4.50

      Variable cost per unit = $15,625 / 12,500 = $1.25

      Contribution margin per unit = $4.50 - $1.25 = $3.25

      Break even units = Fixed cost / contribution per unit = $32,825 / $3.25 = 10,100 units

(c) Margin of safety = Actual Sales – Break even sales

                                    = $56,250 – (10,100 × 4.50) = $56,250 - $45,450 = $10,800

Answer-3:

Sell price per unit = $0.90        

Variable cost per unit = $0.10

Sales unit =1,500,000

Tax rate = 25%

Contribution margin = ($0.90 - $0.10) × 1,500,000 = $1,200,000

Net income = $480,000

Income before tax = $480,000/75% = $640,000

(a) Income before tax = Contribution margin – Fixed cost

       $640,000 = $1,200,000 – Fixed cost

      Fixed cost = $1,200,000 - $640,000 = $560,000

(b) Revised Sales unit =1,500,000 + 600,000 = 2,100,000

      Revised Sell price per unit = $0.80      

      Revised Variable cost per unit = $0.20

     Contribution margin = ($0.80 - $0.20) × 2,100,000 = $1,260,000

     Income before tax = $1,260,000 – Fixed cost

                                       = $1,260,000 - $560,000 = $700,000

     Net income = $700,000 × (1 – 25%) = $525,000

(c) As there is an increase of $45,000 (i.e. $525,000 - $480,000) in net income, Bonnibel's plan may be implemented.