Question

Floatem Boats is a small boat manufacturer. Michael Hughes, the company's president, is currently evaluating the company's performance and is considering options that might be effective at increasing Floatem's profitability. The company's controller, Tobi Leung, has prepared the following cost and expense estimates for next year, on the basis of a sales forecast of $3,210,000:

Direct materials: $792,000

Direct labor: 692,000

Factory overhead: 738,000

Selling expenses: 289,000

Other administrative expenses: 91,000

Total: 2,602,000

After Michael received and reviewed the cost and expense estimates, he realized that Tobi had given him all the data without breaking it out into fixed and variable components. He called her, and she told him the following: "Factory overhead and selling expenses are 39 percent variable, but other administrative expenses are 21 percent variable." If required, round all interim calculations, including percentages, to two decimal places and use your rounded number in subsequent calculations. Round your answers to nearest whole number.

A. How much revenue must Floatem generate to break even?

B. Michael Hughes has set a target profit of $692,000 for next year. How much revenue must Floatem generate to achieve Michael's goal?

Answer 1

A.)

Break even = total fixed cost / sales - variable cost

Fixed cost =

Factory overheads - 738000 * 61% = 450180

Selling expenses - 289000 * 61% = 176290

Other admin expenses - 91000 * 79% = 71890

Total = 698,360

Variable cost -

Direct material = 792000

Direct labor = 692000

Factory overheads = 738000 * 39% = 287820

Selling expenses = 289000 * 39% = 112710

Other admin expenses = 91000 * 21% = 19110

Total = 1,903,640

Variable cost = 1903640 / 3210000 * 100 = 59.30%

Break even revenue = fixed cost / (sales - variable cost) in %

= 698360 / (100 - 59.30)

= $ 1,715,872

B.) Revenue to earn $692000 of profit -

Revenue = (fixed cost + profit) / (Sales - Variable cost) in %

Revenue = (698360 + 692000) / (100 - 59.30)

Revenue = 1390360 / 40.70%

Revenue = 3,416,118