Problem: Kiltop Company sells take-away food. The projected income statement for the coming year follows:
|
|
$
|
|
Sales
|
480,000
|
|
Less: variable costs
|
-249,600
|
|
Contribution margin
|
230,400
|
|
Less: Fixed costs
|
-180,000
|
|
Net profit
|
50,400
|
Required:
Question 1: Compute the contribution margin ratio for Kiltop.
Question 2: How much revenue must Kiltop earn in order to break-even?
Question 3: What volume of sales must be earned if Kiltop wants to earn an after-tax profit equal to 8 per cent of sales? Assume that the tax rate is 34 per cent.
Question 4: What is the effect on the contribution margin ratio if the unit selling price and unit variable cost each increase by 10 per cent?
Question 5: Suppose that management has decided to give a 3 per cent commission on all sales. The projected income statement does not reflect this commission. Re-compute the contribution margin ratio assuming that the commission will be paid. What effect does this have on the break-even point?
Question 6: If the commission is paid as described in requirement 5, management expects sales revenues to increase by $80,000. Is it a sound decision to implement the commission? Support your answer with appropriate computations.
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