Question

Lorge Corporation has collected the following information after its first year of sales. Sales were $900,000 on 90,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $16,700; direct labor $270,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $399,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Required:
a. Compute the contribution margin for the current year and the projected year.
b. Compute the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)
c. Compute the break-even point in units and sales dollars for the first year.

Answer 1

Answer:

a. The Contribution margin for current year is $ 180,000 and for the projected year is $ 198,000

b. The computation of the fixed costs for the current year would be $ 485,700

c. The break-even point in units is 242,850 and sales dollars for the first year is $2,428,500

Explanation:

a. The computation of the contribution margin for the current year and the projected year would be as follows:

Contribution margin Current year Projected year

Sales $                                900,000    990,000

Variable costs$:  

Direct materials                   16,700       18,370

Direct labor                          270,000   297,000

Manufacturing overhead 279,300   307,230

Selling expenses                100,000   110,000

Administrative expenses 54,000   59,400

Total variable costs $        720,000   792,000

Contribution margin $         180,000   198,000

b. The computation of the fixed costs for the current year would be as follows:

Fixed cost                     Current year  

Manufacturing overhead 119,700  

Selling expenses                 150,000  

Administrative expenses 216,000  

Total fixed costs            $ 485,700

c. The break-even point in units and sales dollars for the first year would be as follows:

Break-even point  In units = Total fixed costs / Contribution per unit

Contribution per unit = $180,000 / 90000 units = $2 per unit

Break-even point in units = $485,700 / $2 = 242,850

Break-even point $ = Total fixed costs / Contribution margin ratio

Contribution margin ratio = Contribution margin / Sales = $180,000 / $900,000 = 20%

Break-even point = Total fixed costs / Contribution margin ratio = $485,700 / 20% = $2,428,500