Valencia Manufacturing Company manufactures and sells musical gadgets. The business earned

Operating Income of $220,000 in 2018, when selling price per unit was $200, and the president of Valencia

is under pressure to increase operating income in 2019. Data for variable cost per unit and total fixed costs

were as follows:

Variable expenses per unit:

Direct Material $40

Direct Labour $32

Variable Manufacturing Overhead $18

Fixed expenses:

Fixed Manufacturing Overhead $190,000

Fixed Selling Costs $115,000

Fixed Administrative Costs $135,000

Required:

(a) Using the equation method, calculate the number of units sold in 2018. (4 marks)

(b) Given the sales units calculated in Part (a), prepare a contribution margin income statement for the

year ended December 31, 2018, detailing the composition of total fixed costs and clearly showing

contribution and net income. (3 marks)

(c) Calculate Valencias break-even point in units and in sales dollars. (3 marks)

(d) Calculate the margin of safety in units and in sales dollars. (2 marks)

(e) The management of Valencia Manufacturing Company is desirous of increasing operating income

by 20% in 2019. They expect per unit data and total fixed costs to remain the same in 2018.

Determine the number of units that must be sold to earn this target operating profit. Is this a realistic

goal? (4 marks)

(f) Assume that as a result of reorganizing the production process, Valencia Manufacturing Company

was able to reduce direct material cost per unit by $5 due to a change in the quality of raw material

used in the production process but the expected sales of 6,000 units would decrease by 5% and

total fixed costs are expected to increase by $94,000. What must the new selling price per unit be if

the company wishes to meet the target operating profit for 2019? (6 marks)

(g) You have just begun your summer internship at Valencia Manufacturing. To expand sales, the

business is considering paying a commission to its sales team. You have been asked to compute 1)

the new break-even sales figure, and 2) the operating profit if sales increase by 10% under the new

sales commission plan. She is confident that you can handle the task, because you learned CVP

analysis in your accounting class.

You collected your data, performed your analysis and submitted a memo to your manager, who was

very pleased with the work done. Your report indicated that the new sales commission plan would

result in a significant increase in operating income but only a small increase in break-even sales.

A few days after, you realized that you made an error in the CVP analysis, as the sales personnels

$88,000 monthly salaries were inadvertently left out and you therefore did not include this fixed

marketing cost in your computations. You are not sure what to do, as you are afraid that Valencia

might not offer you permanent employment after the internship.

How would your error affect breakeven sales and operating income under the proposed sales

commission plan? After considering all factors, should you inform your manager or simply keep

quiet? (8 marks)