Question

In: Accounting

YOUR Firm, Inc. expects to sell 200,000 units next year, generating total sales of $ 17,000,000....

YOUR Firm, Inc. expects to sell 200,000 units next year, generating total sales of

$ 17,000,000. Management predicts that profit will be $ 1,250,000 and the contribution margin will be $ 25 per unit.

What is the total expected variable costs?
What is next year’s expected fixed costs?
Compute the expected margin of safety in both units and sales dollars?

Expert Solution

total expected variable costs

Sales - Variable Cost = Contribution

Sales = 17000000 / 200000 = 85

Contribution = 25 (GIVEN)

Sales - Variable Cost = Contribution

85 - Variable Cost = 25

85-25 = Variable Cost

60= Variable Cost

Variable Cost = 60 x 200000 = 12000000

next year’s expected fixed costs

Contribution - Fixed Cost = Profit

Contribution = 25 x 200000 = 5000000

Profit = 1250000 (given)

Contribution - Fixed Cost = Profit

5000000 - Fixed Cost = 1250000

5000000-1250000 = Fixed Cost

Fixed Cost = 3750000

expected margin of safety in both units and sales dollars

Margin of safety = Sales - Break even point

Break even point = Fixed Cost / Contribution

3750000 / 25

150000 units

Margin of safety in units= Sales - Break even point

=200000-150000

= 50000

Margin of safety in units = 50000 x 85

= 4250000

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