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 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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