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Cairo Company: Compute Break Even, Forecast Contribution & Margin Income Statement

22-6A - This year Cairo Company sold 35,000 units of its only product for $16 per unit. Manufacturing and selling the product required $120,000 of fixed manufacturing costs and $180,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Material..............................................................$4.00
Direct labor (paid on the basis of completed units)... 3.00
Variable overhead costs........................................... 0.40
Variable selling and administrative costs....................... 0.20

Next year the company will use new material, which will reduce material costs by 60% and direct labor costs by 40% and will not affect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 40,000 units. Two plans are being considered. Under plan 1, the company will keep the price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase price by 25%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Required

1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2.
2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.

Solution Preview

Solution is provided in a separate excel file attached. It contains the following parts.

1 Current year cost analysis (Contribution approach)

2 Statement of profitability for current ...

Solution Summary

The solution gives 101 words and 2 Excel documents to show how to calculate the break-even point of the data given and how to construct a forecaster contribution margin income statement showing the expected results of the 2 plans.

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