CVP

Suds Soap Co. produces two types of artisanal soap. One is Citrus Burst and the other is

Lavender Fields.

·

The Citrus Burst soap is sold for $6 and has variable costs of $1.50.

·

The Lavender Fields soap sells for $10 and has variable costs of $3.

Suds Soap Co. sells one package of Citrus Burst for every three packages of Lavender Fields

sold. Fixed costs equal $89,250. Luminaire plans on selling a total of 25,000 packages of soap.

The budgeted segmented income statement is below.

Budgeted Income Statement

           Suds Soap Co.

	Citrus Burst	Lavender Fields		Total
Units	6,250	18,750	25,000
Revenue	$37,500	$187,500	$225,000
Variable Costs	$9,375	$56,250	$65,625
Contribution margin	$28,125	$131,250	$159,375
Fixed costs			$89,250
Net Operating
Income			$70,125

A. What is the breakeven point in units for each type of lamp at the current

sales mix?

B. What is the budgeted operating leverage (use the version that is the

inverse of margin of safety percentage)? By how much will profit increase if

revenue increases by 30%?

C. What is the budgeted margin of safety in total sales dollars?

D. Suds Soap Co. is considering buying new production equipment. The

new equipment will increase fixed cost by $18,050 per year and will decrease the

unit variable cost of the Citrus Blend soap by $0.50 and the Lavender Field soap

by $1. Assuming the same sales mix, how many packages of each type of soap

would Suds Soap Co. need to sell to break even?

E. Assuming the same sales mix, at what total sales level would Suds Soap

Co. be indifferent between using the old equipment and buying the new

production equipment? Given the budgeted sales of 25,000 units, should Suds

Soap Co. buy the new production equipment?

Question 3: Decision Making

Kava Inc. manufactures industrial components. One of its products, which is used in the construction of

industrial air conditioners, is known as K65. Data concerning this product are given below:

                                                                                   Per unit

Selling price..............................................................$180

Direct materials..........................................................$29

Direct labor...................................................................$5

Variable manufacturing overhead.................................$4

Fixed manufacturing overhead...................................$21

Variable selling expense...............................................$2

Fixed selling and administrative expense...................$17

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered a variable cost.

1. Prepare a contribution margin format income statement based on the annual

information above.

2.The company has received a special, one-time-only order for 500 units of component

K75, a modified version of component K65, that would be purchased at reduced price of $100 per unit. There would be no variable selling expense for this special order, but they would incur a rental expense of $15,000 for a special machine, as well as the additional expenses listed below.

                                                                                                Per unit

Additional direct materials........................................... $5

Additional direct labor..................................................  $1

Additional variable manufacturing overhead........... $0.75

Assuming that Kava has excess capacity and can fill the order without cutting back on the

production of any product, should this order be accepted? Please provide supporting calculations.

Answer rating: 100% (QA)

A Breakeven point in units for each type of soap at the current sales mix To calculate the breakeven point in units for each type of soap we need to find the point where the contribution margin equals ... View the full answer