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Drake Company produces a single product. Last year’s income statement is as follows: Required: 1. Compute the break-even point in units and sales revenue. 2. What was the margin of safety for Drake Company last year? 3. Suppose that Drake Company is considering an investment in new technology that will increase fixed costs by $250,000 per year, but will lower variable costs to 45 percent of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming Drake makes this investment. What is the new break-even point in units, assuming the investment is made?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter
Section
Chapter 16, Problem 40P
Textbook Problem

Drake Company produces a single product. Last year’s income statement is as follows:

Chapter 16, Problem 40P, Drake Company produces a single product. Last years income statement is as follows: Required: 1.

Required:

  1. 1. Compute the break-even point in units and sales revenue.
  2. 2. What was the margin of safety for Drake Company last year?
  3. 3. Suppose that Drake Company is considering an investment in new technology that will increase fixed costs by $250,000 per year, but will lower variable costs to 45 percent of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming Drake makes this investment. What is the new break-even point in units, assuming the investment is made?

Expert Solution

1.

To determine

Ascertain the break-even point in units and sales revenue.

Explanation of Solution

Contribution Margin Ratio: The contribution margin ratio shows the amount of difference in the actual sales value and the variable expenses in percentage. This margin indicates that percentage which is available for sale above the fixed costs and the profit. The formula for variable cost ratio is shown below:

Contribution Margin ratio = Contribution MarginSales

Break-Even Point: The break-even point refers to the point of sales at which the firm neither earns a profit nor suffers a loss. It is also known as the point of sales or sales value at which the firm recovers the entire cost of fixed and variable nature.

Compute the contribution margin per unit:

Contribution Margin per unit =Contribution MarginNumber of units=$406,00020,000=$20.30

The contribution margin per unit is $20.30

Expert Solution

2.

To determine

Compute the margin of safety in sales revenue for previous year.

Expert Solution

3.

To determine

Draft the income statement for the new proposal and ascertain the break-even point in units.

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Chapter 16 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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