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P5-5B Isaac Corporation

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P5-5B Isaac Corporation has collected the following information after its first year of
sales. Sales were $1,800,000 on 100,000 units; selling expenses $400,000 (30% variable
and 70% fixed); direct materials $456,000; direct labor $250,000; administrative expenses
$484,000 (50% variable and 50% fixed); manufacturing overhead $480,000 (40% variable
and 60% fixed). Top management has asked you to do a CVP analysis so that it can make
plans for the coming year. It has projected that unit sales will increase by 20% next year.

(a) Compute (1) the contribution margin for the current year and the projected year, and
(2) the fixed costs for the current year. (Assume that fixed costs will remain the same
in the projected year.)
(b) Compute the break-even point in units and sales dollars.

(c) The company has a target net income of $213,000.What is the required sales in dollars
for the company to meet its target?

(d) If the company meets its target net income number, by what percentage could its sales
fall before it is operating at a loss? That is, what is its margin of safety ratio?

(e) The company is considering a purchase of equipment that would reduce its direct labor
costs by $100,000 and would change its manufacturing overhead costs to 10% variable
and 90% fixed (assume total manufacturing overhead cost is $480,000, as above). It is
also considering switching to a pure commission basis for its sales staff. This would
change selling expenses to 80% variable and 20% fixed (assume total selling expense
is $400,000, as above). Compute (1) the contribution margin and (2) the contribution
margin ratio, and recompute (3) the break-even point in sales dollars.

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