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P6-2A Lorge Corporation has

Price: $3.50


P6-2A Lorge Corporation has collected the following information after its first year of sales.


Sales were $1,500,000 on 100,000 units
selling expenses $250,000 40% variable 60% fixed
direct materials $511,000 Direct labor 290,000
administrative expenses $270,000 20% variable 80% fixed
manufacturing overhead $350,000 70% variable 30% 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 10% next year.

Instructions
(a) Compute (1) the contribution margin for the current year and the projected year, and
(2) the fi xed costs for the current year. (Assume that fi xed costs will remain the same
in the projected year.)
(b) Compute the break-even point in units and sales dollars for the current year.
(c) The company has a target net income of 200,000 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 $104,000 and would change its manufacturing overhead costs to 30%
variable and 70% fixed (assume total manufacturing overhead cost is $350,000 as above.
It is also considering switching to a pure commission basis for its sales staff.
This would change selling expenses to 90% variable and 10% fixed. Assume
total selling expense is $250,000 as above). Compute (1) the contribution margin and (2) the
contribution margin ratio, and recompute (3) the break-even point in sales dollars.
Comment on the effect each of management’s proposed changes has on the break-even
point.

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