Question

Cost—Volume—Profit Equation, Basic Concepts, Solving for Unknowns (LO 1,2,3 and 5)

Goldilocks Company produces high-end combination shampoos and conditioners in individual-use bottles for hotels. Each bottle sells for $0.90.

The variable costs for each bottle (materials, labour, and overhead) total $0.63. The total fixed costs are $210,600. During the most recent year 830,000 bottles were sold.

Required:

1. What is the BEP in units for Goldilocks? What is the margin of safety in units for the recent year?

2. Prepare an income statement for Goldilocks's most recent year.

3. How many units must be sold for Goldilocks to earn a profit of $40,500?

4. Using the contribution margin percentage approach, what is the level of sales dollars needed for Goldilocks to earn operating income of 20 percent of sales?

Answer 1

Answer 1:

The break even point in units is calculated as follows:

Break-even point (in units) = Fixed expense / Contribution margin p.u.

= $210,600 / $0.27 p.u.

= 780,000 units

Where,

Contribution margin p.u. = Selling price p.u. - variable cost p.u.

= $0.90 - $0.63

= $0.27 p.u.

Margin of safety in units = Actual sales - Break even sales

= 830,000 units - 780,000 units

= 50,000 units

Answer 2:

The income statement is follows:

Sales (830,000 units * $0.90). $747,000

Less: Variable cost (830,000 units * $0.63). $522,900

Contribution margin $224,100

Less: Fixed expense. $210,600

Operating income. $13,500

Answer 3:

Units sold to earn desired profit = (Fixed expense + desired profit) / Contribution margin p.u.

= ($210,600 + $40,500) / $0.27 p.u.

= $251,100 / $0.27 p.u.

= 930,000 units

Answer 4:

Les the desired sales dollar is x

Dollar sales required to earn desired profit = (Fixed expense + desired profit) / Contribution margin ratio

X = ($210,600 + 0.20x) / 30%

0.30x = $210,600 + 0.20x

0.10x = $210,600

X = $210,600 / 0.10

= $2,106,000

Desired operating income = 20% of sales

= 20% * X

= 0.20x

Contribution margin ratio = Contribution margin / Net sales * 100

= $0.27 / $0.90 * 100

= 30%

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