Question

Vince Limited, maker of high quality hand phone cases, has experienced steady growth over the last 5 years. However, increased competition has led Joe, the CEO, to believe that an aggressive campaign is needed next year to maintain the entity's present growth. The financial year begins in January and ends in December. The accountant has presented Joe with the following data for the current year, for use in preparing next year's advertising campaign. Cost Schedules Variable costs Direct labour per case Direct materials Variable overhead Variable cost per case Fixed costs Manufacturing Selling Administrative Per Unit ($) 12.00 6.00 3.00 21.00 $50,000 60,000 58,000 $168,000 $35.00 20,000 units Selling price per case Sales, Current year (2 marks) (3 marks) (2 marks) (2 marks) Required (show all workings): (a) What is the projected operating profit for the current year? (b) What is the break-even point in dollars and units for the current year? (c) What is the margin of safety in dollars and units for the current year? (d) How many units would have to be sold in current year to earn a target profit of $126,000? (e) Joe believes that to attain the sales target for next year additional selling expenses of $24,000 for advertising will be required, with all other costs remaining constant. What will be the break-even point in dollar sales if the entity spends the additional $24,000 advertising expenses? (f) If the entity spends the additional $24,000 for advertising next year, what is the required sales level in dollars to attain $78,400 operating profit after tax with the tax rate 30%? (3 marks) (3 marks)

Answer 1

a) Vince Limited Income Statement Sales $700,000 Variable cost Direct labor $240,000 Direct material $120,000 Variable overhead $60,000 $420,000 Contribution margin $280,000 Fixed cost Manufacturing $50,000 Selling $60,000 Administrative $58,000 Total fixed expenses $168,000 Net Income $112,000 b) Sales $ Break even in sales dollars Fixed cost Contribution margin ratio $168,000 40% $420,000 Units Break even in sales units Fixed cost Contribution margin per unit $168,000 $14 12,000 Selling price Variable cost Contribution margin per unit Contribution margin ratio (Contribution/Selling price)*100 $35 $21 $14 40.00% Sales $ $280,000 Units 8,000 c) Margin of safety (Total Sales - Break even sales) Total Sales Break even sales Sales $ $700,000 $420,000 Units 20,000 12,000 d) Units Units to sell to achieve target profit Fixed cost + Target profit Contribution margin per unit $294,000 $14 21,000 e) Sales $ Break even in sales dollars Fixed cost + Increase Contribution margin ratio $192,000 40% $480,000 f) $78,400 Operating profit after tax Total Target needed: Operating profit before tax Increase in advertising expense Existing fixed cost Total Target $112,000 $68,400/(1-30%) $24,000 $168,000 $304,000 Sales $ Required sales dollars Total Target Contribution margin ratio $304,000 40% $760,000