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Problem 6-2A

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Lorge Corporation has collected the following information after its first year of sales. Sales were \$2,500,000 on 100,000 units; selling expenses \$250,000 (40% variable and 60% fixed); direct materials \$1,351,000; direct labor \$250,000; administrative expenses \$270,000 (20% variable and 80% fixed); and manufacturing overhead \$350,000 (70% variable and 30% fixed). Top management has asked you to do make 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.

Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(1)Contribution margin for current year\$

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Contribution margin for projected year\$

(2)Fixed costs for current year\$

Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.)

Break-even point

unitsBreak-even point\$

The company has a target net income of \$160,000. What is the required sales in dollars for the company to meet its target?

Sales dollars required for target net income\$

If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.)

Margin of safety ratio

%

The company is considering a purchase of equipment that would reduce its direct labor costs by \$110,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is \$350,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is \$250,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.)

1.Contribution margin\$

2.Contribution margin ratio

%3.Break-even point\$

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