Wolf Manufacturing manufactures 16 GB fl ash drives (jump drives). Price and cost data for a relevant range extending to 200,000 units per month are as follows:
Sales price per unit (current monthly sales volume is 120,000 units) .................. $ 20.00
Variable costs per unit:
Direct materials....................................................................................................... $ 6.00
Direct labor............................................................................................................. $ 7.00
Variable manufacturing overhead........................................................................... $ 1.80
Variable selling and administrative expenses......................................................... $ 1.20
Monthly fixed expenses: .....................................................................................
Fixed manufacturing overhead.......................................................................... $182,000
Fixed selling and administrative expenses........................................................ $267,000
Requirements
1. What is the company's contribution margin per unit? contribution margin percentage? Total contribution margin?
2. What would the company's monthly operating income be if the company sold 150,000 units?
3. What would the company's monthly operating income be if the company had sales of $4,000,000?
4. What is the breakeven point in units? In sales dollars?
5. How many units would the company have to sell to earn a target monthly profit of $260,000?
6. Management is currently in contract negotiations with the labor union. If the negotiations fail, direct labor costs will increase by 10% and fixed costs will increase by $28,500 per month. If these costs increase, how many units will the company have to sell each month to break even?
7. Return to the original data for this question and the rest of the questions. What is the company's current operating leverage factor (round to two decimals)?
8. If sales volume increases by 5%, by what percentage will operating income increase?
9. What is the company's current margin of safety in sales dollars? What is its margin of safety as a percentage of sales?
10. Say the company adds a second line of flash drives (32 GB rather than 16 GB). A unit of the 32 GB flash drives will sell for $45 and have variable cost per unit of $21 per unit. The expected sales mix is three of the small flash drives (16 GB) for every one large flash drive (32 GB). Given this sales mix, how many of each type of flash drive will the company need to sell to reach its target monthly profit of $260,000? Is this volume higher or lower than previously needed (in Question 5) to achieve the same target profit? Why?