Red Wine Corporation sells premium quality wine for $50 per bottle. Its direct materials and direct labour costs are $9 and $6 respectively per bottle. It pays its direct labour employees a wage of $12 per hour. The variable overhead is allocated using a POHR of $16.50 per direct labour hour, whereas fixed overhead averages $148,200 per month.
Red Wine believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Red Wine budgeted an amount of $32,000 per month for sales promotions; additionally, it has decided to offer a sales commission of $2.75 per bottle to its sales personnel. Administrative expenses are expected to be $24,000 per month.
Required
1. Compute the expected total variable cost per bottle and the expected contribution margin ratio.
2. Compute the monthly break-even sales in units and dollars.
3. Red Wine has budgeted sales of $7.5 million for the next fiscal year. What is the company’s margin of safety in dollars and as a percentage of budgeted sales?