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Q 3 Jassim Compagny is producing only one product. Two types of direct materials are used...

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Accounting

Q 3 Jassim Compagny is producing only one product. Two types ofdirect materials are used to produce this product direct materialtype A and direct material type B.

The estimated data for Jassim Compagny is as following:

Sales                                                                                       $90,000

Costs:

Direct materials typeA                             $40,000

Hourlyemployees                                      15,000

Manager’ssalary                                        10,000

Direct materials typeB                                 5,000

Marketing                                                   10,000

TotalCosts                                                                   80,000

Budgeted pretaxprofit                                                        $    10,000

            Themarketing costs include $5,000 that does not change with the changein sales volumes.  The income tax rate is 20%.

a.   Compute the revenues needed to achieve atarget after-tax income of $30,000.

b.   What is the margin of safety in revenue?

  

Answer & Explanation Solved by verified expert
4.5 Ratings (626 Votes)

Sales $90,000
Variable Costs:
Direct materials type A $40,000
Hourly employees                                       $15,000
Direct materials type B $5,000
Marketing $5,000
Contribution Margin $25,000
Contribution Margin ratio                                                       0.27777778
Target-Post tax Profit $                                                      30,000.00
Tax rate 20%
Pre tax Profit to be achieved(30000/100%-20%) $                                                      37,500.00
Calculation of fixed Cost
Manager’s salary $                                                      10,000.00
Marketing   $                                                        5,000.00
Fixed Cost $                                                      15,000.00
Revenue required to achieved target income 15000+37500/0.27777778
$                                                    189,000.00
Calculation of Breakeven Point
Formula Fixed cost/Contribution margin ratio
15000/0.27777778
Breakeven Point $                                                      54,000.00
Calculation of margin of safety
Formula

Sales revenue- Breakeven Point

90000-54000
margin of safety

$                                                      36,000.00

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