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# Embleton, Samano, Pacer: CVP graph, break-even, direct labor

#10

Prepare a CVP graph and compute break-even point and margin of safety.
(SO 6, 8)
Embleton Company estimates that variable costs will be 40% of sales, and fixed costs will total \$900,000. The selling price of the product is \$5.

Instructions
A. Prepare a CVP graph, assuming maximum sales of \$4,000,000. (Note: Use \$500,000 increments for sales and costs and 100,000 increments for units.)
B. Compute the break-even point in (1) units and (2) dollars.
C. Compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual sales are \$2 million.

Prepare a direct materials purchases budget.
(SO 3)
Samano Industries has adopted the following production budget for the first 4 months of 2006.
Month Units Month Units
January 10,000 March 5,000
February 8,000 April 4,000
Each unit requires 5 pounds of raw materials costing \$2 per pound. On December 31, 2005, the ending raw materials inventory was 15,000 pounds. Management wants to have a raw materials inventory at the end of the month equal to 30% of next month's production requirements

Instructions
Prepare a direct materials purchases budget by month for the first quarter.

#6
Prepare a direct labor budget.
(SO 3)

Pacer, Inc., is preparing its direct labor budget for 2005 from the following production budget based on a calendar year.
Quarter Units Quarter Units
1 20,000 3 35,000
2 25,000 4 30,000
Each unit requires 1.2 hours of direct labor.

Instructions
Prepare a direct labor budget for 2005. Wage rates are expected to be \$15 for the first 2 quarters and \$16 for quarters 3 and

#### Solution Preview

#10

Prepare a CVP graph and compute break-even point and margin of safety.
(SO 6, 8)
Embleton Company estimates that variable costs will be 40% of sales, and fixed costs will total \$900,000. The selling price of the product is \$5.
Instructions
A. Prepare a CVP graph, assuming maximum sales of \$4,000,000. (Note: Use \$500,000 increments for sales and costs and 100,000 increments for units.)
B. Compute the break-even point in (1) units and (2) dollars.
C. Compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual sales are \$2 million.
(a) \$4,000 &#8194;Sales Line
DOLLARS (000)

&#8194;3,500

&#8194;3,000

&#8194;2,500
&#8194;Total Cost Line
Break-even Point
&#8194;2,000

&#8194;1,500

&#8194;1,000 &#8194;Fixed Cost Line

&#8194;&#8194; ...

#### Solution Summary

This solution is comprised of a detailed explanation to prepare a CVP graph, assuming maximum sales of \$4,000,000, compute the break-even point in (1) units and (2) dollars, compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual sales are \$2 million for Embleton Company, prepare a direct materials purchases budget by month for the first quarter for Samano Industries, and prepare a direct labor budget for 2005 for Pacer, Inc..

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