(Comprehensive; multiproduct) European Flooring makes three types of flooring products: tile, carpet, and parquet. Cost analysis reveals the following costs (expressed on a per square yard basis) are expected for 2000:
|
Tile |
Carpet |
Parquet |
||
|
Direct material |
$5.20 |
$3.25 |
$8.80 |
|
|
Direct labor |
1.80 |
0.40 |
6.40 |
|
|
Variable overhead |
1.00 |
0.15 |
1.75 |
|
|
Variable selling expenses |
0.50 |
0.25 |
2.00 |
|
|
Variable administrative expenses |
0.20 |
0.10 |
0.30 |
|
|
Fixed overhead |
$760,000 |
|||
|
Fixed selling expenses |
240,000 |
|||
|
Fixed administrative expenses |
200,000 |
|||
|
Tile |
Carpet |
Parquet |
|
|
Square yards |
18,000 |
144,000 |
12,000 |
Review of recent tax returns reveals an expected tax rate of 40 percent.
a. Calculate the break even point for 2000.
b. How many square yards of each product are expected to be sold at the break even point?
c. Assume that the company desires a pretax profit of $800,000. How many square yards of each type of product would need to be sold to generate this profit level? How much revenue would be required?
d. Assume that the company desires an after tax profit of $680,000. Use the
contribution margin percentage approach to determine the revenue needed. If the company actually achieves the revenue determined in part (d), what is European Flooring margin of safety in (1) dollars and (2) percentage?