# Donkey Corporation has collected the following information after

Donkey Corporation has collected the following information after its first year of sales. Net sales were \$1,000,000 on 50,000 units; selling expenses \$200,000 (30% variable and 70% fixed); direct materials \$300,000; direct labor \$170,000; administrative expenses \$250,000 (30% variable and 70% fixed); manufacturing overhead \$240,000 (20% variable and 80% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 20% next year.

Instructions
(a) Compute
(1) The contribution margin for the current year and the projected year,
(2) The fixed costs for the current year.
(Assume that fixed costs will remain the same in the projected year.)
(b) Compute the break-even point in units and sales dollars for the current year.
(c) The company has a target net income of \$187,000.What is the required sales in dollars for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?
(e) The company is considering a purchase of equipment that would reduce its direct labor costs by \$70,000 and would change its manufacturing overhead costs to 10% variable and 90% fixed (assume total manufacturing overhead cost is \$240,000, as above).
It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 80% variable and 20% fixed (assume total selling expense is \$200,000, as above). Compute
(1) The contribution margin and
(2) The contribution margin ratio,
(3) Recompute the break-even point in sales dollars. Comment on the effect each of management's proposed changes has on the break-even point.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...