FINANCIAL ACCOUNTING
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Author: Libby
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)Smith-Pelley Inc produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:
Sales Less: Variable Expenses Contribution Margin Less: Fixed Expenses Operating Income $540,000 $360,000 $180,000 $120,000 $60,000
The company produced and sold 120,000 kilograms of product during the month. There was no beginning or ending inventories.
a) Given the present situation, compute: 1. The Wreak-even sales in kilograms.
2. The break even sales in dollars. (
3. The sales in kilograms that would be required to produce operating income of $90,000
The margin of safety in dollars
b) An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Smith-Pelley has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease
1. Should the company choose the lease or the royalty plan? Show all calculations.
2. Under the royalty plan, compute the break-even point in kilograms.
3. Under the royalty plan, compute the break-even point in dollars.
4. Under the royalty plan, determine the sales in kilograms that would be required to produce operating income of $90,000
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