Evergreen Corporation Manufactures Circuit Boards and Is in the Process

question 113

Multiple Choice

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.
$\begin{array}{lr}\text {Sales}&&\$3,500,000\\\text {Cost of sales:}\\\text { Direct Material } & \$ 500,000 \\\text { Direct labor } & 250,000 \\\text { Variable Overhead } & 275,000 \\\text { Fixed Overhead } & 600,000&1,625,000\\\text { Gross Profit}&&\$1,875,000\\\text { Selling and General \& Admin. Exp.}\\\text { Variable}&750,000 \\\text { Fixed}&250,000&1,000,000\\\text { Operating Income }&&\$875,000\end{array}$
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For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in sales, a 10 percent increase in variable costs, and a $45,000 increase in fixed costs.
The break-even point for next year would be:

• A) $3,022,500.
• B) $2,947,500.
• C) $2,668,750.
• D) $2,168,225.

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Definitions:

Target Costing

An accounting strategy that sets prices based on market conditions and then manages costs to meet those prices, aiming for profitability.

Target Selling Price

The price a company aims to sell its product for, determined by market conditions, cost structure, and profit margin goals.

New Product

A good or service that has recently been developed and introduced to the market, offering new features, benefits, or improvements over previous versions.

Target Cost

The maximum amount that can be spent on a product while still earning the required profit margin, based on market-driven pricing.