Question

Amos Electric Supplies manufactures relays and currently sells 200,000 units annually to producers of electronic equipment. John Harris, president of the company, anticipates a 20% increase in the cost per unit of direct labour on January 1 of next year. He expects all other costs and expenses to remain the same. Harris has asked you to assist him in developing the information necessary to prepare a reasonable product strategy for next year. Being that volume is the primary factor affecting costs and expenses, semi variable costs have been separated into their fixed and variable segments. Beginning and ending inventories remain at a level of 3,000 units. Current plant capacity is 210,000 units. The current-year data assembled is as follows: $15 Sales price per unit.. Variable costs per unit: Direct materials.......... .................$3 Direct labour.... ..... ......... $1 Variable manufacturing overhead and selling and administrative expenses......$2 $6 Fixed costs......... ..... $1,000,000 Instructions: 1. Compute the current contribution margin and contribution ratio. pute the break-even point in units under the current situation and after January 1 3. What increase in selling price would be necessary to cover the 20% increase in direct labour cost and still maintain the current contribution margin. 4. Calculate the current operating income.

Answer 1

1.Current Contribution Margin = Sales – Variable costs

= (15-6)*200,000

= $1,800,000

Contribution Ratio = Contribution Margin/Sales

= 9/15

= 60%

2.Break even units = Fixed costs/Contribution Margin per unit

Current = 1,000,000/9

= $111,111.11 units

After Jan1 = 1,000,000/(9-1*20%)

= 113,636.36 units

3.Increase in selling price required = Increase in cost

= $0.20 per unit

4.Operating Income = Sales – variable costs – fixed costs

= (15-6)*200,000 – 1,000,000

= $800,000