1. Cost Volume Profit 15 marks

The entity above prepared the forecasted income statement presented. The entity expects to sell 250,000 units during the next year. The entity uses a process costing system, and Chief Financial Officer has been asked to answer the questions below. There is a need to update the IT system which is not in the amounts above. Sales have over time, been 15% better or 15% worse than forecast for this company.

Questions

1. What is the contribution margin ratio and contribution margin per unit?

2. What is break-even sales dollars and units?

3. What is the safety margin of the forecasted sales level versus break-even sales? Does this level of safety raise concerns, why?

4. The entity would prefer to achieve an operating profit of $500,000. What is the level of required sales units and dollars?

5. If IT fixed costs go up by $250,000 for a proposed new IT system, what is break-even sales units for the year and dollar sales?

Part A - Cost Volume Profit (15 marks) Forecast Sales Direct Material Costs Direct Labour Cost Variable Factory Overhead Fixed Fadory Overhead Costs of Goods Sold Gross Profit Corporate Fixed costs Operating Profit Income Statement 5,000,000 (1,000,000) (1,250,000) (750,000) (1.000.000) (4,000,000) 1,000,000 (750,000) 250,000 The entity above prepared the forecasted income statement presented. The entity expects to sell 250,000 units during the next year. The entity uses a process costing system, and Chief Financial Officer has been asked to answer the questions below. There is a need to update the IT system which is not in the amounts above. Sales have over time, been 15% better or 15% worse than forecast for this company. Questions 1. What is the contribution margin ratio and contribution margin per unit? 2. What is break-even sales dollars and units? 3. What is the safety margin of the forecasted sales level versus break-even sales? Does this level of safety raise concerns, why? 4. The entity would prefer to achieve an operating profit of $500,000. What is the level of required sales units and dollars? 5. If IT fixed costs go up by $250,000 for a proposed new IT system, what is break-even sales units for the year and dollar sales? Forecast Sales Direct Material Costs Direct Labour Cost Variable Factory Overhead Fixed Factory Overhead Costs of Goods Sold Gross Profit Corporate Fixed Costs Operating Profit Income Statement 5,000,000 (1,000,000) (1,250,000) (750,000) (1,000,000) (4,000,000) 1,000,000 (750,000) 250,000