# Question & Answer: The Hampshire Company manufactures umbrellas that sell for \$12.50 each. In 2014, the company mad…..

The Hampshire Company manufactures umbrellas that sell for \$12.50 each. In 2014, the company made and sold 60,000 umbrellas. The company had fixed manufacturing costs of \$216,000. It also had fixed costs for administration of \$79,525. The per-unit costs of each umbrella are as follows:

Direct Materials: \$3.00

Direct Labor: \$1.50

Variable Selling Expenses: \$1.10

Using the information above, perform a cost-volume-profit (CVP) analysis by completing the steps below. All CVP calculations should be completed in the Hampshire Company Spreadsheet. Note: The CVP analysis satisfies Part A of Section I.

Compute net income before tax.

Compute the unit contribution margin in dollars and the contribution margin ratio for one umbrella.

Calculate the break-even point in units and dollars of revenue. Note: This is a required part of the CVP analysis and satisfies Part C of Section I.

Calculate the margin of safety:

In units

In sales dollars

As a percentage

Calculate the degree of operating leverage.

Assume that sales will increase by 20% in 2015. Calculate the percentage of before-tax income for this increase. Provide calculations to prove that your percentage increase is correct based on the operating leverage calculated in step 5.

Compute the number of umbrellas that Hampshire is required to sell if it plans to earn \$120,000 in income before taxes by using the target income formula. Proof your calculation.

A company that specializes in tours in England has offered to purchase 5,000 umbrellas at \$11 each from Hampshire. The variable selling costs of these additional units will be \$1.30 as opposed to \$1.10 per unit. Also, this production activity will incur another \$15,000 of fixed administrative costs. Should Hampshire agree to sell these additional 5,000 umbrellas to the touring business? Provide calculations to support your decision.

 Requirement 1 Units Price Totals Sales 60,000 \$12.50 \$                            750,000.00 Variable Costs 60,000 \$6.00 \$                            360,000.00 Fixed Costs \$                            295,525.00 Net Income \$94,475.00 Requirement 2 Contribution Margin per Unit in Dollars = Selling Price – Variable Costs Selling Price Variable Costs Contribution Margin per Unit \$12.50 \$6.00 \$6.50 Contribution Margin Ratio = Contribution Margin/Selling Price Contribution Margin Selling Price Contribution Margin Ratio \$6.50 \$12.50 52% Requirement 3 Break-Even Point = Fixed Costs / Contribution Margin Fixed Costs Contribution Margin Break-Even Point in Units (Rounded) \$295,525 \$6.50 45,465 Break-Even Point in Units X Selling Price per Unit = Break-Even Point Sales Break-Even Point in Units Selling Price per Unit Break-Even Point in Sales (Rounded) 45,465 \$12.50 \$568,313 Requirement 4A Margin of Safety in Units = Current Unit Sales – Break-Even Point in Unit Sales Current Unit Sales Break-Even Point in Sales Margin of Safety in Units 60,000 568,313 508,313 Requirement 4B Margin of Safety in Dollars = Current Sales in Dollars – Break-Even Point Sales in Dollars Current Sales in Dollars Break-Even Point in Dollars Margin of Safety in Dollars \$750,000 \$568,313 \$181,687 Requirement 4C Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales Margin of Safety in Units Current Unit Sales Margin of Safety Percentage 508,313 60,000 847% Requirement 5 Degree of Operating Leverage = Contribution Margin / Operating Income Contribution Margin Operating Income Operating Leverage \$390,000.00 \$94,475.00 Requirement 6 Units \$ Per Unit Totals Sales X \$ \$ Variable Costs X \$ \$ Fixed Costs \$ Net Income \$ Operating Leverage Times % Increase Increase would be XX% Prior Income \$ From Part 1 Increase \$ Prior Income X   XX% Above Total \$ Requirement 7 Targeted Income = (Fixed Costs + Target Income) / Contribution Margin Fixed Costs + Target Income Divided by Contribution Margin # of Units (Rounded) Fixed Costs \$ Target Income \$ Total \$ \$ X # of Units Above X \$ Per Unit Proof Revenue XX,XXX X \$XX.XX \$ Variable Costs XX,XXX X \$X.XX \$ Contribution Margin \$ Fixed Costs \$ Net Income \$ Requirement 8 Sales Mix Current Specialty Total Expected Sales Units X X Revenue = Sales X Price \$ \$ \$ Variable Costs X Units \$ \$ \$ Contribution Margin \$ \$ \$ Fixed Costs \$ \$ \$ Operating Income \$ Prior Net Income From Requirement 1 \$ Additional Operating Income (Operating Income Above Less Prior Income) \$ Decision With Explanation