Just Pen Ltd is a company producing and selling pens. The general manager is trying to increase sales by proposing a new advertising strategy, which will increase fixed costs by $50,000 in addition to the $300,000 currently spent. In addition, the manager is also convinced that a 5% cut in selling price (from $20 to $19) will boost sales volume from 40,000 to 50,000 pens. Variable cost will remain at $10 per pen. The managing director has asked you as the company’s accountant to evaluate what impact these changes will have on the contribution margin and margin of safety. Required: 1. Calculate the current contribution margin ratio (%). 2. Calculate the contribution margin ratio if the manager’s ideas are used (%, rounded to 2 decimal places). 3. Calculate the current margin of safety in units. 4. Calculate the margin of safety in units if the manager’s ideas are used. 5. Outline the assumptions under cost–volume–profit analysis that the managing director should consider. Question 4 CVP Analysis Gilley Limited sells a single product. The company’s most recent contribution income statement is given below: Sales (4,000 units) $120,000 Variable expenses 68,000 Contribution Margin 52,000 Fixed Expenses 40,000 Net Income 12,000 Required: 1. Calculate the contribution margin per unit. 2. If sales doubled to $240,000, calculate the total variable costs. 3. If sales doubled to $240,000, calculate the total fixed costs. 4. If ten more units were sold, prepare a new income statement to reflect the changes. 5. Based on the new scenario, i.e. if ten more units were sold, calculate the number of units that must be sold to break even. 6. Based on the new scenario, i.e. if ten more units were sold, calculate the number of units that must be sold to achieve profits of $20,000.
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