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Math  /  Data & Statistics

QuestionWalton Modems, Incorporated makes modem cards that are used in notebook computers. The company completed the following transactions during year 1. All purchases and sales were made with cash.
1. Acquired $930,000\$ 930,000 of cash from the owners.
2. Purchased $360,000\$ 360,000 of manufacturing equipment. The equipment has a $48,000\$ 48,000 salvage value and a four-year useful life.
3. The company started and completed 6,800 modems. Direct materials purchased and used amounted to $58\$ 58 per unit.
4. Direct labor costs amounted to $43\$ 43 per unit.
5. The cost of manufacturing supplies used amounted to $22\$ 22 per unit.
6 . The company paid $68,000\$ 68,000 to rent the manufacturing facility.
7. Walton sold all 6,800 units at a cash price of $210\$ 210 per unit.
8. The sales staff was paid a $15.00\$ 15.00 per unit sales commission.
9. Paid $57,000\$ 57,000 to purchase equipment for administrative offices. The equipment was expected to have a $4,800\$ 4,800 salvage value and a three-year useful life.
10. Administrative expenses consisting of office rental and salaries amounted to \$93,640.
Required a. Use the following partially completed form to prepare an income statement using the contribution margin format. b. Determine the break-even point in units and in dollars. c. Assume that next year's sales are budgeted to be the same as the current year's sales. Determine the margin of safety expressed as a percentage.
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Studdy Solution

STEP 1

1. All transactions are cash-based.
2. The contribution margin format is used for the income statement.
3. Depreciation is calculated using the straight-line method.
4. All units produced are sold.

STEP 2

1. Prepare the income statement using the contribution margin format.
2. Calculate the break-even point in units and dollars.
3. Determine the margin of safety as a percentage.

STEP 3

Calculate total sales revenue:
Total Sales Revenue=Units Sold×Selling Price per Unit=6,800×210 \text{Total Sales Revenue} = \text{Units Sold} \times \text{Selling Price per Unit} = 6,800 \times 210
Total Sales Revenue=$1,428,000 \text{Total Sales Revenue} = \$1,428,000

STEP 4

Calculate total variable costs:
- Direct materials cost per unit: \$58 - Direct labor cost per unit: \$43 - Manufacturing supplies cost per unit: \$22 - Sales commission per unit: \$15
Total Variable Cost per Unit=58+43+22+15=$138 \text{Total Variable Cost per Unit} = 58 + 43 + 22 + 15 = \$138
Total Variable Costs=6,800×138 \text{Total Variable Costs} = 6,800 \times 138
Total Variable Costs=$938,400 \text{Total Variable Costs} = \$938,400

STEP 5

Calculate contribution margin:
Contribution Margin=Total Sales Revenue−Total Variable Costs \text{Contribution Margin} = \text{Total Sales Revenue} - \text{Total Variable Costs}
Contribution Margin=1,428,000−938,400 \text{Contribution Margin} = 1,428,000 - 938,400
Contribution Margin=$489,600 \text{Contribution Margin} = \$489,600

STEP 6

Calculate total fixed costs:
- Manufacturing equipment depreciation: (360,000−48,000)/4=$78,000(360,000 - 48,000) / 4 = \$78,000 - Rent for manufacturing facility: \$68,000 - Administrative equipment depreciation: \((57,000 - 4,800) / 3 = \$17,400\) - Administrative expenses: \$93,640
Total Fixed Costs=78,000+68,000+17,400+93,640 \text{Total Fixed Costs} = 78,000 + 68,000 + 17,400 + 93,640
Total Fixed Costs=$257,040 \text{Total Fixed Costs} = \$257,040

STEP 7

Calculate net operating income:
Net Operating Income=Contribution Margin−Total Fixed Costs \text{Net Operating Income} = \text{Contribution Margin} - \text{Total Fixed Costs}
Net Operating Income=489,600−257,040 \text{Net Operating Income} = 489,600 - 257,040
Net Operating Income=$232,560 \text{Net Operating Income} = \$232,560

STEP 8

Calculate break-even point in units:
Break-even Point (Units)=Total Fixed CostsContribution Margin per Unit \text{Break-even Point (Units)} = \frac{\text{Total Fixed Costs}}{\text{Contribution Margin per Unit}}
Contribution Margin per Unit=210−138=$72 \text{Contribution Margin per Unit} = 210 - 138 = \$72
Break-even Point (Units)=257,04072 \text{Break-even Point (Units)} = \frac{257,040}{72}
Break-even Point (Units)≈3,573 \text{Break-even Point (Units)} \approx 3,573

STEP 9

Calculate break-even point in dollars:
Break-even Point (Dollars)=Break-even Point (Units)×Selling Price per Unit \text{Break-even Point (Dollars)} = \text{Break-even Point (Units)} \times \text{Selling Price per Unit}
Break-even Point (Dollars)=3,573×210 \text{Break-even Point (Dollars)} = 3,573 \times 210
Break-even Point (Dollars)≈$750,330 \text{Break-even Point (Dollars)} \approx \$750,330

STEP 10

Calculate margin of safety:
Margin of Safety (Units)=Actual Sales Units−Break-even Sales Units \text{Margin of Safety (Units)} = \text{Actual Sales Units} - \text{Break-even Sales Units}
Margin of Safety (Units)=6,800−3,573 \text{Margin of Safety (Units)} = 6,800 - 3,573
Margin of Safety (Units)=3,227 \text{Margin of Safety (Units)} = 3,227
Margin of Safety (Percentage)=(Margin of Safety (Units)Actual Sales Units)×100 \text{Margin of Safety (Percentage)} = \left(\frac{\text{Margin of Safety (Units)}}{\text{Actual Sales Units}}\right) \times 100
Margin of Safety (Percentage)=(3,2276,800)×100 \text{Margin of Safety (Percentage)} = \left(\frac{3,227}{6,800}\right) \times 100
Margin of Safety (Percentage)≈47.46% \text{Margin of Safety (Percentage)} \approx 47.46\%
The income statement, break-even point, and margin of safety have been calculated.

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