3-36 Cvp

3-36 CVP analysis, income taxes (CMA adapted)

R. A. Ro & Company, a manufacturer of quality handmade walnut bowls, has

had a steady growth in sales for the past five years. However, increased

competition has led Mr. Ro, the president, to believe that an aggressive

marketing campaign will be necessary next year to maintain the company's

present growth. To prepare for next year's marketing campaign, the

company's controller has prepared and presented Mr. Ro with the following

data for the current year, 2011:

Variable cost (per bowl)

Direct materials $3.25

Direct Manufacturing labor 8.00

Overhead (manufacturing, marketing,

distribution and customer services) 2.50

Total variable cost per bowl $13.75

Fixed costs

Manufacturing $25,000

Marketing, distribution, and customer service 110,000

Total fixed costs $135,000

Selling price $25.00

Expected sales

Units 20,000

Dollars $500,000

Income tax rate 40%

1. What is the projected net income for 2011?

Sales -Total Variable Cost - Total Fixed Costs = Operating Income

$500,000 - ($13.75)(20,000) - $135,000 = OI

$500,000 - $275,000 - $135,000 = OI

OI = $90,000 Before tax value

Taxes = Tax Rate X OI = .4 X OI

NI = OI - Taxes = $90,000 - (.4)($90,000)

NI = $90,000 - $36,000 = $54,000

2. What is the breakeven point in units for 2011?

Let X = B/E units

Sales - TVC - TFC = 0

$25(X) - $13.75(X) - $135,000 = 0 11.25

$11.25(X) = $135,000

X = $135,000 / $11.25 = 12,000 units

3. Mr. Rho has set the revenue target for 2012 at a level of $550,000

(or 22,000 bowls). He believes an additional marketing cost of...