Multiple Product Planning with Taxes
In the year 2008, Wiggins Processing Company had the followingcontribution income statement:
WIGGINS PROCESSINGCOMPANY
Contribution Income Statement
For the Year 2008 Sales $1,000,000 Variable costs Cost of goods sold $460,000 Selling and administrative 200,000 (660,000) Contribution margin 340,000 Fixed Costs Factory overhead 192,000 Selling and administrative 80,000 (272,000) Before-tax profit 68,000 Income taxes (38%) (25,840) After-tax profit $42,160
HINT: Round the contribution margin ratio totwo decimal places for your calculations below.
(a) Determine the annual break-even point in sales dollars.
(b) Determine the annual margin of safety in sales dollars.
(c) What is the break-even point in sales dollars if managementmakes a decision that increases fixed costs by $34,000?
(d) With the current cost structure, including fixed costs of$272,000, what dollar sales volume is required to provide anafter-tax net income of $160,000?
Do not round until your final answer. Round your answer to thenearest dollar.
(e) Prepare an abbreviated contribution income statement toverify that the solution to part (d) will provide the desiredafter-tax income.
Round your answers to the nearest dollar. Use rounded answersfor subsequent calculations. Do not use negative signs with any ofyour answers.
Sales (f) Variable Costs (66% of sales) (g) Contribution Margin (h) Fixed Costs (i) Net Income Before Taxes (j) Income Taxes (38%) (k) Net income after taxes (L)
Multiple Product Planning with Taxes
In the year 2008, Wiggins Processing Company had the followingcontribution income statement:
| WIGGINS PROCESSINGCOMPANY Contribution Income Statement For the Year 2008 | ||
|---|---|---|
| Sales | $1,000,000 | |
| Variable costs | ||
| Cost of goods sold | $460,000 | |
| Selling and administrative | 200,000 | (660,000) |
| Contribution margin | 340,000 | |
| Fixed Costs | ||
| Factory overhead | 192,000 | |
| Selling and administrative | 80,000 | (272,000) |
| Before-tax profit | 68,000 | |
| Income taxes (38%) | (25,840) | |
| After-tax profit | $42,160 | |
HINT: Round the contribution margin ratio totwo decimal places for your calculations below.
(a) Determine the annual break-even point in sales dollars.
(b) Determine the annual margin of safety in sales dollars.
(c) What is the break-even point in sales dollars if managementmakes a decision that increases fixed costs by $34,000?
(d) With the current cost structure, including fixed costs of$272,000, what dollar sales volume is required to provide anafter-tax net income of $160,000?
Do not round until your final answer. Round your answer to thenearest dollar.
(e) Prepare an abbreviated contribution income statement toverify that the solution to part (d) will provide the desiredafter-tax income.
Round your answers to the nearest dollar. Use rounded answersfor subsequent calculations. Do not use negative signs with any ofyour answers.
| Sales | (f) |
| Variable Costs (66% of sales) | (g) |
| Contribution Margin | (h) |
| Fixed Costs | (i) |
| Net Income Before Taxes | (j) |
| Income Taxes (38%) | (k) |
| Net income after taxes | (L) |
Related questions
The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
3. Calculate the break-even point in units and dollars ofrevenue.
4. Calculate the margin of safety:
In units
In sales dollars
As a percentage
5. Calculate the degree of operating leverage.
6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.
7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.
8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.
| Requirement 1 | ||||
| Units | Price | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 2 | ||||
| Contribution Margin per Unitin Dollars = Selling Price â Variable Costs | ||||
| Selling Price | Variable Costs | Contribution Margin per Unit | ||
| Contribution Margin Ratio =Contribution Margin/Selling Price | ||||
| Contribution Margin | Selling Price | Contribution Margin Ratio | ||
| Requirement 3 | ||||
| Break-Even Point = Fixed Costs/ Contribution Margin | ||||
| Fixed Costs | Contribution Margin | Break-Even Point in Units (Rounded) | ||
| Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales | ||||
| Break-Even Point in Units | Selling Price per Unit | Break-Even Point in Sales (Rounded) | ||
| Requirement 4A | ||||
| Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales | ||||
| Current Unit Sales | Break-Even Point in Sales | Margin of Safety in Units | ||
| Requirement 4B | ||||
| Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars | ||||
| Current Sales in Dollars | Break-Even Point in Dollars | Margin of Safety in Dollars | ||
| Requirement 4C | ||||
| Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales | ||||
| Margin of Safety in Units | Current Unit Sales | Margin of Safety Percentage | ||
| Requirement 5 | ||||
| Degree of Operating Leverage =Contribution Margin / Operating Income | ||||
| Contribution Margin | Operating Income | Operating Leverage | ||
| Requirement 6 | ||||
| Units | $ Per Unit | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Operating Leverage | Times % Increase | Increase would be XX% | ||
| Prior Income | $ | From Part 1 | ||
| Increase | $ | Prior Income X XX% Above | ||
| Total | $ | |||
| Requirement 7 | ||||
| Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin | ||||
| Fixed Costs + Target Income | Divided by Contribution Margin | # of Units (Rounded) | ||
| Fixed Costs | $ | |||
| Target Income | $ | |||
| Total | $ | $ | X | |
| # of Units Above X $ Per Unit | ||||
| Proof | Revenue | XX,XXX X $XX.XX | $ | |
| Variable Costs | XX,XXX X $X.XX | $ | ||
| Contribution Margin | $ | |||
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 8 | ||||
| Sales Mix | ||||
| Current | Specialty | Total | ||
| Expected Sales Units | X | X | ||
| Revenue = Sales X Price | $ | $ | $ | |
| Variable Costs X Units | $ | $ | $ | |
| Contribution Margin | $ | $ | $ | |
| Fixed Costs | $ | $ | $ | |
| Operating Income | $ | |||
| Prior Net Income FromRequirement 1 | $ | |||
| Additional Operating Income | (Operating Income Above Less Prior Income) | $ | ||
| Decision With Explanation | ||||
| Jorge Company bottles and distributes B-Lite, a diet soft drink.The beverage is sold for 50 cents per 16-ounce bottle to retailers,who charge customers 78 cents per bottle. For the year 2014,management estimates the following revenues and costs.
|
| *(a)
Prepare a CVP income statement for 2014 based on managementâsestimates.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Variable Cost per Bottle: $ .34
|
| Compute the break-even point in (1) units and (2) dollars.(Round answers to 0 decimal places, e.g.1,225.)
|
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 172,900units at a price of $126 per unit during 2014. Its income statementfor 2014 is as follows:
| Sales | $21,785,400 | ||
| Cost of goods sold | 7,728,000 | ||
| Gross profit | $14,057,400 | ||
| Expenses: | |||
| Selling expenses | $3,864,000 | ||
| Administrative expenses | 2,310,000 | ||
| Total expenses | 6,174,000 | ||
| Income from operations | $7,883,400 |
The division of costs between fixed and variable is asfollows:
| Fixed | Variable | |||
| Cost of goods sold | 40% | 60% | ||
| Selling expenses | 50% | 50% | ||
| Administrative expenses | 70% | 30% | ||
Management is considering a plant expansion program that willpermit an increase of $2,142,000 in yearly sales. The expansionwill increase fixed costs by $285,600, but will not affect therelationship between sales and variable costs.
Required:
1. Determine for 2014 the total fixed costs andthe total variable costs.
| Total fixed costs | $ |
| Total variable costs | $ |
2. Determine for 2014 (a) the unit variablecost and (b) the unit contribution margin.
| Unit variable cost | $ |
| Unit contribution margin | $ |
3. Compute the break-even sales (units) for2014.
units
4. Compute the break-even sales (units) underthe proposed program.
units
5. Determine the amount of sales (units) thatwould be necessary under the proposed program to realize the$7,883,400 of income from operations that was earned in 2014.
units
6. Determine the maximum income from operationspossible with the expanded plant.
$
7. If the proposal is accepted and sales remainat the 2014 level, what will the income or loss from operations befor 2015?
$ SelectIncomeLoss
