Lulu Manufacturing is a newly organized manufacturing business that plans to produce and sell 34,000 units of an innovative electronic product in year 2021. The following estimates have been made for the company's costs and expenses:

Fixed Variable per Unit

$ $

Manufacturing costs:

Direct materials 45

Direct labor 30

Manufacturing overhead 280,000 4

Period costs:

Selling expenses 2

Administrative expenses 250,000

530,000 81

Required:

a) If the company set a target of earning an operating income of $320,000 by producing and selling 34,000 units during the first year of operations, compute:

i) the required contribution margin per unit, and

ii) the required selling price per unit.

b) As the company would like to fully utilize the production capacity and earn more operating income than the target, a sales manager proposed that the company can consider promoting the new product through social media pages with a freelance key opinion leader (KOL) and set the selling price to $100. According to the manager's forecast, the company could produce and sell 60,000 units in next year. However, the selling expense would be increased by $0.5 per unit and an additional $100,000 would be spent to recruit the KOL.

i) make a contribution format income statement under this proposal for the year ended 31 December 2021 (per unit figures are also required); and

ii) Compute the degree of operating leverage under this proposal (round to the nearest 2 d.p.).

c) Finally, the senior management approved and endorsed the proposal as stated in part (b). Several weeks later, there was an outbreak of COVID-19 pandemic. The senior management worried about the target sales volume could not be achieved. They also worried about a decline of sales volume might also lead to an operating loss to the company.

i) Compute the break-even sales in unit under the proposal in part (b); and

ii) Using the answer in part (b)(ii), compute the estimated net operating income/loss if there is a 20%

decline of sales under the proposal in part (b).

d) "The variable cost per unit varies with output, whereas the fixed cost per unit is constant. Do you agree? Explain.