CVP and Breakeven

Wilson is a wholesale distributor of widgets. The company services groceries, convenience stores, and superstores like Wal-Mart. Small but steady growth has been achieved over the past few years while widget prices have been increasing. The company is formulating its plans for the coming fiscal year. Presented below are the data used to project the current year's after tax net income of img64,960.

Average selling price: $9.60 per case

Average variable costs:

Widget production: $4.80 per case

Selling expense: $.96 per case

Total: $5.76 per case

Annual fixed costs: $1,056,000

Expected annual sales volume: 390,000 cases

Tax rate: 40%

Manufacturers of widgets have announced that they will increase prices of their products on average 15% in the coming year due to increases in raw materials and labor costs. All other variable costs change 15% as well. Wilson expects all other costs will remain at the same rates or levels as the current year. These changes have not been entered into the information presented above.

Answer the following:

•What is Wilson's break-even point in cases of widgets for the current year?
•What selling price per case must Wilson charge to cover the 15% increase in variable production costs (the 15% increase includes all variable costs associated with this problem) and still maintain the current contribution margin percentage?
•What is the number of units that Wilson must achieve in the coming year to maintain the same net income after taxes as projected for the current year if the selling price of widgets remains at $9.60 per case and the variable production costs of widgets increase 15%?
2. Explain how capacity utilization affects product mix and profitability.