# Each unit of product made by Jeremy, Inc. sells for $120. The company has an annual production

## Question:

Direct material...................................................... $27.00

Direct labor........................................................... 9.00

Variable overhead................................................. 3.60

Variable selling expenses........................................ 12.60

Total variable cost.................................................. $52.20

Total ﬁxed costs are $1,830,600 per year.

Required:

(a) Calculate the contribution margin and contribution margin ratio for the product.

(b) Determine the break-even point in units.

(c) Calculate the break-even point in dollars using the contribution margin ratio.

(d) Determine Jeremy, Inc.’s margin of safety in units and sales dollars, as well as a percentage.

(e) Compute Jeremy, Inc.’s degree of operating lever- age. If sales increase by 20 percent, by what percent age would pretax income increase?

(f) Use original data. How many units would Jeremy need to sell to break even if ﬁxed costs increase by $94,920?

(g) Use original data. How many units must be sold for Jeremy, Inc. to earn $339,000 after-tax if the company has a 25 percent tax rate?

(h) Quanta Corp. has offered to buy 15,000 units from Jeremy, Inc. The variable cost per unit in this sale would increase by $4.50 because of special shipping and packaging. Fixed costs for this sale would be $9,000. Additionally, Jeremy, Inc. will need to pay a 10 percent commission on selling price to the manager who brought in the offer. This sale would not affect other sales or their costs. If Jeremy, Inc. wants pretax income from this sale to be $11,250, at what price should the units be sold? Prove your answer using an income statement for these 15,000 units.

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...

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