Question

sara Company distributes a single product. The company’s sales and expenses for a recent month follow:

	Total	Per Unit
Sales	$560,000	$80
Variable expenses	392,000	56
Contribution margin	168,000	24
Fixed expenses	150,000
Net operating income	$ 18,000

Instructions:

1. What is the monthly break-even point in units sold and in sales dollars?

2. What is the company’s CM ratio and the variable expense ratio?

3. Without resorting to computations, what is the total contribution margin at the break-even point?

4. If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

5. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms.

6. How many units would have to be sold each month to earn a target profit of $18,000?

7. sara Company is considering enhancing its profits by adding a high quality speaker to its telephone devices. The variable expenses per unit will change from $56 (current) to be $60 (proposed). The suggestion will reduce fixed expenses from $150,000 (current) to be $102,000 (proposed). If sales per unit equal $80 (will not change) and the company sells 10,000 units, by how much will the profits increase/ decrease?

8. Calculate the break-even sales in dollars for the proposed plan in required 7

Answer 1

1. Break-even points in units = Fixed cost / Contribution per unit = $150,000 / $24 = 6,250 units.

Break-even points in dollars= Fixed cost / Contribution margin ratio = $150,000 / 30% = $500,000

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2. Contribution margin ratio = Contribution / Sales = $24 / $80 = 30%

Variable expense ratio = ( 1 - CM ratio) = ( 1 -0.3) = 70%

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3. Total contribution at Break even point= 6,250 units

Sales (6,250 * $80)	$500,000
Less: Variable cost (6,250 * $56)	$(350,000)
Total Contributon (Sales - Variable cost)	$150,000

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4. For 7000 units.

Sales ($560,000 + 80,000)	$640,000
Less: Variable cost	($392,000)
Contribution	$248,000
Less: Fixed cost	($150,000)
Net Operating Income	$98,000

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5. Margin of safety in dollars = Net Operating Income / Contribution margin ratio = $18,000 / 30% = $60,000

MArgin of safety in % = Margin of safety in dollars / Total Sales= $60,000 / $560,000 = 10.71%

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6.Desired profit of $18,000.

Desired profit = Fixed cost + Desired profit / Contribution margin ratio = $150,000 + $18,000 / 30% = $560,000

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7.

Sales (10,000 units * $80)	$800,000
Less: Variable cost (10,000 units * $60)	($600,000)
Contribution	$200,000
Less: Fixed cost	102,000
Net Operating Income	$98,000

*If we follow the proposed proposal. The company has to get $98,000.

* Increased to $80,000 ($98,000 - $18,000)

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8. Break-even points in dollars= Fixed cost / Contribution margin ratio = $102,000 / 25% = $408,000

Contribution margin ratio = Contribution / Sales = ($80 - $60) / $80 = 25%

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