Choosing the lease or the royalty plan


Problem 1:

Fruit-Pit Company produces a single product. The results of the company's operations for a typical MONTH are presented in contribution format as follows:

Sales                         $540,000
Variable expenses       $360,000
Contribution margin     $180,000
Fixed expenses            $120,000
Net operating income     $60,000

The company produced and sold 120,000 gallons of product during the month. (There were no beginning or ending inventories)

Please find:

1. The break-even sales in gallons.
2. The break-even sales in dollars.
3. The sales in gallons that would be required to produce net operating income of $90,000.
4. The margin of safety (MOS) in dollars.

Problem 2: An important part of processing is performed by a machine that is currently being leased for $20,000 per MONTH. Fruit-Pit Company has been offered a business-option whereby it would pay $0.10 incentive per gallon processed by the machine rather than the monthly lease.

1.    Should the company choose the lease or the royalty plan?
2.    Under the incentive plan compute break-even point in gallons.
3.    Under the incentive plan compute break-even point in dollars.
4.    Under the incentive plan determine the sales in gallons that would be required to produce net operating income of $90,000.

Solution Preview :

Prepared by a verified Expert
Finance Basics: Choosing the lease or the royalty plan
Reference No:- TGS02059014

Now Priced at $25 (50% Discount)

Recommended (92%)

Rated (4.4/5)