3-14

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability Required Sales in UnitsFixed cost + Target profit$280,000 + $252,000–––––––––––––––––––––––––––––=–––––––––––––––––––=9,500 unitsContribution margin per unit$56Required Sales in Number of DollarsSales price$ 80x Number of units 9,500Sales volume in dollars$760,000Income StatementSales ($80 x 9,500)$ 760,000Variable cost ($24 x 9,500) (228,000)Contribution margin 532,000Fixed cost (280,000)Net income$ 252,000f.The change in variable cost will cause the contribution mar-gin to decrease to $50 ($80 – $30).Required Sales in UnitsFixed cost + Target profit$280,000 + $252,000––––––––––––––––––––––––––––––=–––––––––––––––––––=10,640 unitsContribution margin per unit$50Problem 3-23A (continued)Required Sales in Dollars3-15

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability Sales Price$ 80x Number of units 10,640Sales volume in dollars$851,200Income StatementSales ($80 x 10,640)$ 851,200Variable cost ($30 x 10,640) (319,200)Contribution margin 532,000Fixed cost (280,000)Net income$ 252,000g.Margin of Safety ComputationsUnitsDollarsBudgeted sales at $80 per unit10,000$800,000Break-even sales at $80 per unit*5,600(448,000)Margin of safety4,400$352,000*[$280,000 ÷ ($80 – $30)] = 5,600 Percentage ComputationMargin of safety in dollars$352,000–––––––––––––––––––––––––––=––––––––––––––=44%Budgeted sales$800,0003-16

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability Problem 3-23A (continued)h.Break-Even Graph3-172,0004,0006,0008,00010,000-0-Total cost Total sales5,600 break-even point in unitsUnits300,000400,000$800,000700,000600,000500,000-0-Area of LossArea of profitabilityFixed cost$280,000$448,000Break-evenpoint in dol-larsBreak-evenpoint200,000100,000

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability Problem 3-24AFormula for Computing Sales Volume to Earn Target Profit of $60,000Fixed cost + Target profit$240,000 + $60,000––––––––––––––––––––––––––––––=–––––––––––––––––––––=6,000 unitsContribution margin per unit$125 – $75Required Sales in DollarsSales price$ 125x Number of units 6,000Sales volume in dollars$750,000Income StatementSales (6,000 x $125)$750,000Variable cost (6,000 x $75) (450,000)Contribution margin 300,000Fixed cost (240,000)Net income$ 60,000b.Mayer should proceed with plans to improve product quality. Asindicated by the following income statement, the quality enhance-ment project would add $90,000 to net income ($150,000 –$60,000).Income StatementSales (10,000 x $125)$1,250,000Variable cost (10,000 x $85) (850,000)Contribution margin 400,000Fixed cost ($240,000 + $10,000)(250,000)Net income$ 150,0003-18a.

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability Problem 3-24A (continued)c.

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