Problem:
Green Thumb makes small plant stands that sell for $25 each. The company's annual level of production and sales is 120,000 units. In addition to $430,500 of fixed manufacturing overhead and $159,050 of fixed administrative expenses, the following per-unit costs have been determined for each plant stand:
|
Direct material
|
$ 6.00
|
|
Direct labor
|
3.00
|
|
Variable manufacturing overhead
|
0.80
|
|
Variable selling expense
|
2.20
|
|
Total variable cost
|
$12.00
|
Required:
a. Prepare a variable costing income statement at the current level of production and sales.
b. Calculate the unit contribution margin in dollars and the contribution margin ratio for a plant stand.
c. Determine the break-even point in number of plant stands.
d. Calculate the dollar break-even point using the contribution margin ratio.
e. Determine Green Thumb's margin of safety in units, in sales dollars, and as a percentage.
f. Compute the company's degree of operating leverage. If sales increase by 25 percent, by what percentage will before-tax income increase?
g. How many plant stands must the company sell to earn $996,450 in before-tax income?
h. If the company wants to earn $657,800 after tax and is subject to a 20 percent tax rate, how many units must be sold?
i. How many plant stands must be sold to break even if Green Thumb's fixed manufacturing cost increases by $7,865? (Use the original data.)
j. The company has received an offer from a Brazilian company to buy 4,000 plant stands at $20 per unit. The per-unit variable selling cost of the additional units will be $2.80 (rather than $2.20), and $18,000 of additional fixed administrative cost will be incurred. This sale would not affect domestic sales or their cost. Based on quantitative factors alone, should Green Thumb accept this offer?