Question

Morgan Designs manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates: Total Per Unit Sales (20,000 units) $50.00 Direct materials $1,000,000 $200,000 $50,000 $10.00 Direct labor (variable) $2.50 Manufacturing overhead: Variable $3.50 $70,000 $80,000 Fixed $4.00 Selling & administrative: Variable $100,000 $5.00 Fixed $30,000 $1.50 If the per unit variable production costs increase by 15%, and fixed selling and administrative costs increase by 12%, what will be the new break-even point in dollar sales?

Answer 1

Total Variable cost per Unit = Direct Material+ Direct labor + Variable MOH +Variable Selling and Administrative OH

Varibale production cost per Unit = 10.00+2.50+3.50= 16

Fixed cost = Fixed MOH + Fixed Selling and Administrative Expenses

= 80,000+30,000

REvised the data :

Variable Prodcution cost per Unit increase by 15%

Variable Prodcut cost per Unit = 16.00 *1.15 = 18.40

Variable cost per Unit = 18.40+5.00 = $ 23.40

Fixed Selling and Administrative Expenses increased by 12%

Fixed Selling and Admin Expenses = 30,000*1.12 = 33,600

Total Fixed cost = 80,000+33,600 = 113,600

Break Even Point is Dollar Sales = Fixed cost / CM ratio

CM ratio = ( selling Price -Varible cost) / Selling Price

= (50-23.40)/50 = 53.20%

Break Even Pointin Dollar sales = 113,600 / 0.532 = 213,533.835

Answer : $ 213,534