Margon Co is planning to sell a product as follows :

Part 1

Selling Price: $17.00

Relevant range : 65,000 <-------> 120,000

Costs: Manufacturing

Variable costs $9.00

Fixed costs $450,000

Selling and Administration

Variable costs $1.25

Fixed $50,000

The company is deciding on how much to produce and sell

Required:

1. Determine the break-even sales in quantity and sales dollars

2. Determine the level of sales necessary to generate a profit of $54,000

3. Explain the relevant range referred to above, show the variable cost and

the fixed cost per unit at 115,000 units. Why would you not use the above

information to determine the costs at 125000 units [8]

Part 2 During the first year of operations Margon produced 100,000 units based on the above information, and sold 80,000 units:

Required :

1. Determine Operating Income using variable costing

2. Determine the margin of safety

3. Determine the degree of operating leverage

Part 3 Without preparing an income statement, explain how you would determine the operating income that would be reported under the Absorption Costing system. [5]