Accounting-The Sarah Corporation sells only one product

| January 30, 2017

Question
The Sarah Corporation sells only one product. The following is budgeted information for that product:

Annual production and sales capacity (units)

60,000

Budgeted selling price

$50 per unit

Variable cost of goods sold

$14 per unit

Fixed manufacturing costs

$360,000

Variable selling and administrative costs

$6 per unit

Fixed selling and administrative costs

$240,000

Sarah’s corporate tax rate is 30%.

How many units does Sarah need to sell to breakeven?

How much revenue does Sarah need to generate to breakeven?

How many units does Sarah need to sell to earn an operating profit (before taxes) of $420,000?

How much revenue does Sarah need to generate to earn net income (after taxes) of $210,000?

Assume Sarah is currently producing and selling 52,000 units. By what percentage will operating income change if sales increase by 12% from 40,000 units? Be sure to provide figures to justify your answer.

Assume Sarah is currently producing and selling 52,000 units. By what percentage will operating income change if sales decrease by 8% from 52,000 units? Be sure to provide figures to justify your answer.

Question #2

A production company is planning to sell tickets to a show for $100 each. It budgets variable costs to be $10 per attendee. Total fixed costs are estimated to be $90,000. The theatre can accommodate up to 900 people because of safety concerns. What should the production company do? Why? Be specific in your response.

Question #3

The following is budgeted information for the Megan Corporation:

Product 1

Product 2

Annual production & sales

90,000

60,000

Projected selling price

$50

$80

Direct Production Cost Information

Materials (per unit)

$8

$12

Direct Labor (per unit)

$12

$18

Additional information:

Selling & administrative costs (a mixed cost) are budgeted to be $900,000 at the production and sales listed above. The variable component is $4 per unit (same for each product).
Manufacturing overhead costs (a mixed cost) are budgeted to be $1,300,000 at the production and sales listed above. The fixed component is $400,000. Each product uses the same amount of variable manufacturing overhead per unit.
Assuming the budgeted sales mix remains intact, how many units of each product does Megan need to sell in order to break even?

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