Huber Corporation has collected the following information after its first year of sales. Sales were $1,000,000 on 40,000 units; selling expenses $200,000 (30% variable and 70% fixed); direct materials $327,000; direct labor $190,000; administrative expenses $250,000 (30% variable and 70% fi xed); manufacturing overhead $240,000 (20% variable and 80% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 20% next year.

(d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?

(e) The company is considering a purchase of equipment that would reduce its direct labor costs by $90,000 and would change its manufacturing overhead costs to 10% variable and 90% fixed (assume total manufacturing overhead cost is $240,000, as above). 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 total selling expense is $200,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and (3) recompute the break-even point in sales dollars. Comment on the effect each of managements proposed changes has on the break-even point.