Managerial Accounting: P20-1A Thermal Tent, Inc., is a newly organized manufacturing

Managerial Accounting
Week 5
P20-1A Setting Sales Price and Computing the Break-Even Point
Thermal Tent, Inc., is a newly organized manufacturing business that plans to manufacture and sell 50,000 units per year of a new product. The following estimates have been made of the company's costs and expenses (other than income taxes):
Fixed Variable per Unit
Manufacturing costs:
Direct materials 47.00
Direct labor 32.00
Manufacturing overhead 340,000 4.00
Period costs:
Selling expenses 1.00
Administrative expenses 200,000
Totals $540,000 $84.00

Instructions
a. What should the company establish as the sales price per unit if it sets a target of earning an operating income of $260,000 by producing and selling 50,000 units during the first year of operations? (Hint: First compute the required contribution margin per unit.)
b. At the unit sales price computed in part a, how many units must the company produce and sell to break even? (Assume all units produced are sold.)
c. What will be the margin of safety (in dollars) if the company produces and sells 50,000 units at the sales price computed in part a? Using the margin of safety, compute operating income at 50,000 units.
d. (1) Assume that the marketing manager thinks that the price of this product must be no higher than $94 to ensure market penetration. (2) Will setting the sales price at $94 enable Thermal Tent to break even, given the plans to manufacture and sell 50,000 units?
(2) Given the company's plans to manufacture and sell 50,000 units at a selling price per unit of $94, Thermal Tent will not be able to break-even and will have an operating loss of $40,000. In (1), we have computed that at a selling price of $94, the company will have to sell 54,000 units to cover the fixed costs of $540,000. Since the units sold is only 50,000 units, the 4,000 units difference multiplied by the contribution margin per unit of $10 results in the operating loss of $40,000.
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