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Assignment 2: CVP
Vassallo Corporation has collected the following information after its first year of sales. Sales were $1,800,000 on 100,000 units; selling expenses $400,000 (30% variable and 70% fixed); direct materials $456,000; direct labour $250,000; administrative expenses $484,000 (50% variable and 50% fixed); manufacturing overhead $480,000 (40% variable and 60% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 20% next year.
In approximately 850 words:
• Compute:
o The contribution margin for the current year and the projected year.
o The fixed costs for the current year. Assume that fixed costs will remain the same in the projected year.
• Compute the break-even point in units and sales dollars.
• The company has a target net income of $213,000. What are the required sales in dollars for the company to meet its target?
• If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?
• The company is considering a purchase of equipment that would reduce its direct labour costs by $100,000 and would change its manufacturing overhead costs to 10% variable and 90% fixed (assume total manufacturing overhead cost is $480,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 80% variable and 20% fixed (assume total selling expense is $400,000, as above). Compute:
o The contribution margin. o The contribution margin ratio.
o Recompute the break-even point in sales dollars.
• Comment on the effect each of management’s proposed changes has on the break-even point. Justify your response.
Note: This assignment must adhere to the following:
• Include a cover sheet that contains your course name, your first and last name and student number.
• Clearly indicate question number and part thereof for each of your answers.
• Begin a new part on a new page.
• Submit as a Word document only; we will use track changes to provide feedback and grade your submission. Do not submit a pdf.
• To keep the size of your file small, minimise the number of pictures (if any) to a minimum.
• Do not take a screen shot of your Excel file (if used) and insert as a picture; please create a table within your Word document by copying and pasting over your Excel table.
• References use APA style as per text guide. If you use hyperlinks for referencing information, please include the hyperlink and name of site in your reference list.
• In text referencing, reference list, appendices and calculations not included in word count.

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