MANAGERIAL ACCOUNTING – QUESTION 2

Belli-Pitt, Inc, produces a single product. The results of the company’s operations for a typical month are summarized in contribution format as follows:

Sales ……………………………..$540,000

Variable expenses …………..360,000

Contribution margin ……….180,000

Fixed expenses ………………120,000

Net operating income ……..$ 60,000

The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories.

Required:

A. Given the present situation, compute

1. The break-even sales in kilograms.

2. The break-even sales in dollars.

3. The sales in kilograms that would be required to produce net operating income of $90,000.

4. 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. Belli-Pitt 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?

2. Under the royalty plan compute break-even point in kilograms.

3. Under the royalty plan compute break-even point in dollars.

4. Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.