Bayview Corporation has collected the following information after its first year of sales: Net sales were $2 million on 100,000 units, selling expenses were $300,000 (40% variable and 60% fixed), direct materials were $500,000 (100% variable), direct labour was $380,000 (100% variable), administrative expenses were $350,000 (50% variable and 50% fixed), and manufacturing overhead was $370,000 (30% variable and 70% fixed). Top Managers have asked you to do a CVP analysis so that they can make plans for the coming year. They have projected that sales 1 and variable costs will increase by 15% next year. Assume no change in the price of the units. 2 3 Instructions: a) Calculate (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that 4 fixed costs will remain the same in the projected year.) 5 b) Calculate the break-even point in units and sales dollars. 6 c) The company has a target operating income of $484,000. Calculate the required sales amount in dollars for the company to meet its target. d) The company is considering buying equipment this year that would reduce its direct labour costs by $140,000 and would change its manufacturing overhead costs to 20% variable and 80% fixed. (Assume the total manufacturing overhead cost is $370,000, as above. Assume no change in the volume or price of the units. 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 the total selling expenses are $300,000, as above.) Calculate (1) the contribution margin (2) the contribution margin ratio, and (3) recalculate the break-even point in sales dollars. Comment on the effect each of management's 7 proposed changes has on the break-even point. 8 B D E F G . 1 K $ Fixed % Fixed Variable Total Variable Total Total Current Year Projected Year 1 1 (a) 2 Costs: Direct materials 4 Direct labour 5 Manufacturing overhead Selling expenses 7 Administrative expenses 8 Total 9 10 11 12 Units sold Saler 13 Sales 14 Direct materials 15 Direct labour 16 Manufacturing overhead 17 Selling expenses 18 Administrative expenses 19 Total variable costs 20 Contribution margin 21 Manufacturing overhead 22 Selling expenses 23 Administrative expenses 24 Total fixed costs 25 Operating income (loss) 26 27 (b) 28 Contribution margin ratio 29 Break-even in sales dollars - 30 31 Per unit contribution margin 32 Break-even in units 33 34 (c) 35 Target Operating Income 36 Sales to meet target operating income: 37 38 (d) 39 New costs: 40 41 Direct labour 42 Manufacturing overhead 43 Selling expenses 44 Administrative expenses 45 Total 46 47 CVP Income Statement 48 Sales (100,000 units) 49 Total variable costs 50 Contribution margin 51 Total fixed costs 52 Operating income (loss) 53 54 Contribution margin ratio 55 Break-even in sales dollars - 56 57 Per unit contribution margin 58 Break-even in units 59 60 Variable Variable Fixed Total 10 Direct materials