Business Solutions Sells Upscale Modular Desk Units And Offi ✓ Solved

Business Solutions Sells Upscale Modular Desk Units And Office Chairs

Business Solutions sells upscale modular desk units and office chairs in the ratio of 3:2 (desk unit:chair). The selling prices are $1,250 per desk unit and $500 per chair. The variable costs are $750 per desk unit and $250 per chair. Fixed costs are $120,000.

Sample Paper For Above instruction

Question 1: Compute the selling price per composite unit.

The ratio of desk units to chairs is 3:2, meaning each composite unit comprises 3 desk units and 2 chairs. The total selling price for this composite unit is calculated as follows:

Total selling price = (3 x $1250) + (2 x $500) = $3750 + $1000 = $4750

Selling price per composite unit = Total selling price / Total number of units = $4750 / 5 units = $950

Answer: 950

Question 2: Compute the break-even point in dollar sales for 2011.

The contribution margin per unit (composite unit) is calculated as:

Contribution margin per composite unit = Selling price per composite unit - Variable costs per composite unit

Variable costs per composite unit = (3 x $750) + (2 x $250) = $2250 + $500 = $2750

Contribution margin per composite unit = $950 - $2750 = -$1800

Since the contribution margin per composite unit is negative, the business cannot break even under current pricing and cost structure. Therefore, the break-even point in dollar sales cannot be achieved with these figures unless prices or costs are adjusted.

Alternatively, considering the standard break-even volume: Fixed costs / Contribution margin per unit. But since contribution margin is negative, the break-even in dollar terms is not achievable unless costs or prices are changed.

Answer: Cannot be determined with current data; contribution margin negative.

Question 3: Compute the predicted break-even in dollar sales for 2012 assuming the machine is installed and no change in unit sales price.

Given the previous calculation indicates a negative contribution margin, unless the scenario or data is adjusted, the business cannot determine a positive break-even point under current conditions.

Question 4: Prepare a forecasted contribution margin income statement for 2012 with the machine installed, units sold being 20,300, and no change in unit price.

Total sales = 20,300 units x $950 per composite unit = $19,285,000

Variable costs = 20,300 units x $2750 per composite unit = $55,825,000

Contribution margin = Total sales - Total variable costs = $19,285,000 - $55,825,000 = -(44,540,000)

Fixed costs = $120,000

Net income = Contribution margin - Fixed costs = -$44,660,000

Answer: Sales: 19,285,000; Variable costs: 55,825,000; Contribution margin: -44,540,000; Fixed costs: 120,000; Net income: -44,660,000

Question 5: Compute the sales level needed to earn $161,000 in after-tax income, assuming 30% tax rate, with the machine installed, no change in unit sales price.

Pre-tax income required = $161,000 / (1 - 0.30) = $230,000

Target contribution margin = Fixed costs + Pre-tax income = $120,000 + $230,000 = $350,000

Contribution margin ratio = (Selling price per composite unit - Variable costs per composite unit) / Selling price per composite unit

Contribution margin ratio = ($950 - $2750) / $950 = -$1800 / $950 ≈ -1.8947

Because the contribution margin ratio is negative, achieving a profit of $161,000 net income is infeasible under current conditions.

Alternative Approach: The second product scenario with Cairo's company

Given the data on Cairo Company's product costs and pricing, the analysis proceeds as follows:

Question 1: Compute the break-even point in dollar sales for both plans.

First, determine the contribution margin per unit after cost reductions:

• Material cost reduction: 60% of $4.60 = $2.76 saved. New material cost = $1.84
• Labor cost reduction: 40% of $3.60 = $1.44 saved. New labor cost = $2.16
• Other variable costs (overhead and selling costs) remain the same: $0.46 + $0.26 = $0.72

New variable cost per unit with the cost reductions:

$1.84 + $2.16 + $0.46 + $0.26 = $4.72

Plan 1: No price change, sales volume last year (41,000 units)

Unit sales price remains at $17.20, so contribution margin per unit:

$17.20 - $4.72 = $12.48

Break-even units = Fixed costs / contribution margin per unit

Total fixed manufacturing = $126,000; fixed selling & admin = $186,000; total fixed costs = $312,000

Break-even units = $312,000 / $12.48 ≈ 25,000 units

Break-even sales dollars = 25,000 x $17.20 = $430,000

Plan 2: Price increase by 25%, sales decrease by 10%

New sales price = $17.20 x 1.25 = $21.50

Expected units sold = 41,000 x 0.90 = 36,900 units

Contribution margin per unit = $21.50 - $4.72 = $16.78

Break-even units = $312,000 / $16.78 ≈ 18,620 units

Break-even sales dollars = 18,620 x $21.50 ≈ $400,430

Question 2: Prepare a forecasted contribution margin income statement for plans 1 and 2.

	Plan 1	Plan 2
Sales	$ 704,200	$ 793,350
Total Variable Costs	$ 95,544	$ 65,232
Contribution Margin	$ 608,656	$ 728,118
Total Fixed Costs	$ 312,000	$ 312,000
Income Before Taxes	$ 296,656	$ 416,118
Income Tax (40%)	$ 118,662	$ 166,447
Net Income	$ 177,994	$ 249,671

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