Question

Problem #2: CVP Analysis Sharon McFarland has just earned a degree in management from a prestigious university in the United Kingdom. She has taken a position as assistant to the president at Johnson Engineering, which manufactures tungsten carbide drill bits for the gold mining industry. Johnson produces two types of bits: a *" diameter and a 1" diameter model. The manufacturing takes place in three departments. Tip-fabricating makes the tungsten carbide drill tips out of powdered wolfram. The forging department slots the alloy steel rod and heat-treats it for strength. Finally, the assembly department attaches the tips to the steel rods in a high-temperature brazing process. Volume, pricing and cost data is provided below. 3/4 Inch 1 Inch tota Sales (000's units) 275 200 475 Selling Price $55.00 $75.00 $30,125 Direct Material $15.00 $21.00 $8,325 Direct Labor $5.00 $10.00 $3,375 Manufacturing OH* $17.00 $22.00 $9,075 Gross profit $18.00 $22.00 $9,350 Selling, General & Administrative** $7.00 $5.00 $2,925 Operating profit $11.00 $17.00 6,425

Answer 1

(2) Calculation of WACM: Sales Price Variable Cost Contribution per unit. Sales Cunits) 3/4 inch 55 20 35 275 linch 75 31 44 200 WACM (275x 35 + 200*44) (275 x 55 + 200 x 75) - 61.16% 18,4 25 30,125 (3) Break - even volume Total Fixed cost Contribution peu unit Break even volume for 3/4 inch 275,000 X * 355 55,000 units . Break -even volume for I inch = 200,000 45 44 = 22,728 units. (4) Volume to acheive puetax OI of $8,000 Required volume for 314 inch (275,000x7) +8,000 35 = 55, 229 units (200,000 $5) +5.000 I Required volume for I inch = = 22,910 units