Description
Tom Lamb and his long-term personal friend, Kari Legga, have established a flourishing business selling lamb products at retail to several thousand customers from nearby Big City, Michigan. The customers gladly drive the short five miles to the lamb store, because the exquisite taste of the grain-fed lambs, whose fleece at one time was as white as snow, is beyond comparison. The lamb store, called Legga Lamb to Go sells the product for $8.00 per pound and purchases them at $3.00 per pound. Average weight per order is 5 pounds. Variable selling costs are 20 per cent of sales per pound and fixed costs are $180,000 annually.
In the five years that the lamb store has been in existence, their best year ever was selling 100,000 pounds in 2009; the worst year was 2007 when they sold 59,000 pounds.
Required:
a. Determine the gross profit per pound. ___________
b. The break-even sales in dollars are $ _______________________. .
c. Legga Lamp has a target profit of $122,000. Therefore, the sales needed to achieve this target profit are $ _______ or ________ pounds of product.
d. Kari and Tom are disagreeing on an important business concept. She would like to increase target profit to $150,000 annually. Tom is reluctant to go along with this because he does not feel that the break-even point should be moved that far to the right on the volume-cost-profit graph. Karie snaps back that he is confused with too much college education and graph analysis. They look at you, their financial advisor, for the resolution to this issue. Don't let them down.
Explanation & Answer
Attached.
SURNAME 1
Student Name
Name of Instructor
Unit Code
Date
MANAGERIAL ACCOUNTING
1. Gross profit, G.P= Selling price- purchasing price (8-5)
= $5
2. Break even point=
Fixed costs
Contribution margin ratio
Contribution margin ratio= 100-20= 80%
Break even point= 180,000/80% = 225,000
Break even sales= $225,000
3. Number of units to be sold= fixed costs+ target profit
Contribution margin ratio
= (180,000+ 122,000)/ 80%
= $377,500 or 47,187.5 pounds
4. The volume-cost-profit graph is not a theoretical idea but actually
captures the financial situation. Tom is justified in doing a volume ...