P20-1A Thermal Tent Inc. is a
newly organized manufacturing business that plans to manufacture and sell
50,000 units per yr. of a new product. The following estimates have been made
of the company’s costs and expenses (other than income taxes).
P20-1A: Setting Sales Price and
Computing the Break-Even Point
P20-1A Thermal Tent Inc. is a
newly organized manufacturing business that plans to manufacture and sell
50,000 units per yr. of a new product. The following estimates have been made
of the company’s costs and expenses (other than income taxes).
Fixed Variable per Unit
Manufacturing costs:
Direct
materials………………………… $47
Direct
labor…………………………….. $32
Manufacturing
overhead……………..... $340,000 $ 4
Period costs:
Selling
expenses………………………. $1
Administrative
expenses……………… $200,000
TOTALS…………………………………….. = $540,000 = $84
Instructions:
a.) What should
the company establish as the sales price per unit if it sets a target of
earning an operating income of $260,000 by producing and selling 50,000 units
during the first year of operations? (Hint: First compute the required
contribution margin per unit.)
b.) At the unit
sales price computed in part a, how many units must the company produce and
sell to break even? (Assume all units produced are sold.)
c.) What will
be the margin of safety (in dollars) if the company produces and sells 50,000
units @ the sales price computed in part a? Using the margin of safety, compute
operating income @ 50,000 units.
Assume that the marketing manager
thinks that the price of this product must be no higher than $94 to ensure
market penetration. Will setting the sales price @ $94 enables Thermal Tent to
break even, given the plans to manufacture and sell 50,000 units? Explain your
answer.
TUTORIAL PREVIEW
a.) What should
the company establish as the sales price per unit if it sets a target of
earning an operating income of $260,000 by producing and selling 50,000 units
during the first year of operations? (Hint: First compute the required
contribution margin per unit.)
Desired sales = fixed cost + desired operating income
Sales price per unit – variable cost per unit
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