FongFone Ltd. manufactures cell phones, which are priced at $250. Mr. Fong, the president of FongFone, has come to you for help in terms of the company's cost structure. You are troubled because the data produced by the accounting system of FongFone do not distinguish between variable and fixed costs.
After some analysis, you have identified various cost behaviour patterns. You have determined that the margin of safety is $75,000 and sales in breakeven units are 2,700; your analysis was made easier by the fact that it is FongFone's policy not to carry any inventories. Instead, the company fi nishes pending orders sometime in December and gives employees vacations that end in early January of the following year.
You have also collected the following information for the 2012 fi scal year:
............................................................2012
Direct labour...................................... $170,000
Direct material..................................... 210,000
Variable manufacturing overhead................ 80,000
Gross margin % ....................................22.50%
Contribution margin %..................................... 30.00%
Income-tax rate .....................................25.00%
REQUIRED
A. Calculate the following costs for 2012:
1. Sales in dollars
2. Variable selling and administrative expenses
3. Fixed manufacturing overhead
4. Fixed selling and administrative expenses
5. Earnings (income) before taxes
B. Determine the sales volume in dollars and in units that FongFone must achieve to earn a $36,000 income after taxes. Calculate the degree of operating leverage. If sales increase by 8%, what is the impact on the operating income?