Bill Johnson, sales manager, and Diane Buswell, controller, at Current Designs are beginning to analyze the cost considerations for one of the composite models of the kayak division. They have provided the following production and operational costs necessary to produce one composite kayak.
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Kevlar
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$250 per kayak
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Resin and supplies
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$100 per kayak
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Finishing kit (seat, rudder, ropes, etc.)
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$170 per kayak
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Labor
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$420 per kayak
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Selling and administrative expenses-variable
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$400 per kayak
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Selling and administrative expenses-fixed
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$119,700 per year
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Manufacturing overhead-fixed
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$240,000 per year
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Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget projections for the upcoming year. Bill has informed you that the selling price of the com- posite kayak will be $2,000.
Instructions
(a) Calculate variable costs per unit.
(b) Determine the contribution margin per unit.
(c) Using the contribution margin per unit, determine the break-even point in units for this product line.
(d) Assume that Current Designs plans to earn $270,600 on this product line. Using the contribution margin per unit, calculate the number of units that need to be sold to achieve this goal.
(e) Based on the most recent sales forecast, Current Designs plans to sell 1,000 units of this model. Using your results from part (c), calculate the margin of safety and the margin of safety ratio.