Cost Volume Profit:

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 the Human Resources Department has been asked to achieve the forecasted level of labour costs. There is a need to hire skilled employees at a maximum of $25 per hour including benefits and keep total hours worked at 50,000.

Questions (show your calculations)

1. What is the contribution margin ratio and contribution 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 ?
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 Direct Labour Cost goes up by $250,000, what happens to break-even sales units for the year? What is a policy that the Human Resources Department should recommend to monitor the labour cost forecast?

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