Question

1.

Test Company reported the following income statement for the most recent period.

Sales (6,000 units)	$120,000
Variable expenses	72,000
Contribution margin	48,000
Fixed expenses	30,000
Operating income	$18,000

Determine the breakeven point in units.

Note: Give your answer using commas. Do not include the word “units.”

Example: 12,345

2. Determine the number of units Test Company must sell to earn operating income of $20,000. Note: Give your answer using commas. Do not include the word “units.”

3.

Determine the breakeven point in dollars.

Note: Give your answer using dollar signs and commas but not decimal points (cents).

Example: $12,345

4.

Determine the sales revenue Test Company must generate to earn operating income of $30,000.

Note: Give your answer using dollar signs and commas but not decimal points (cents).

5.

Determine the margin of safety in dollars.

Note: Give your answer using dollar signs and commas but not decimal points (cents).

6.

Determine the margin of safety in units.

Note: Give your answer using commas. Do not include the word “units.”

Example: 12,345

7.

Test Company’s sales manager proposed holding a Holiday Sale. Prices would be discounted 5% and an additional $1,000 would be used for advertising to promote the event. Determine the number of units Test Company must sell during the promotion to continue earning $18,000.

Note: Give your answer using commas. Do not include the word “units.”

Example: 12,345

8.

Test Company reported sales of $250,000, variable expenses of $190,000 and fixed expenses of $48,000. Determine the sales revenue needed to break even.

Note: Give your answer using dollar signs and commas but not decimal points (cents).

Example: $12,345

Answer 1

(1)Break Even point(in units):

Sales(6,000units) = $120,000

Selling price per unit(120,000/6000) = 20

Variable Cost per unit(72,000/6000) = 12

Contribution Margin per unit($)    8

Fixed Expenses = $30,000

Break-even point is computed by using the following equation:

     Fixed Costs/Unit Contribution Margin

= 30,000/8

= 3,750

(2)Sales(units) to earn Operating Income or target profir of ($20,000) is computed as follows:

Required Sales(units) = [Fixed costs + Target Profit]/Unit contribution margin

= [30,000+20,000]/8

   = 6,250

(3)Break Point in dollars is computed by using the following equation:

Total Fixed costs/Contribution margin ratio

Contributiion margin ratio = (Contribution margin/Sales)*100

= [48,000/120,000]*100

=40%

Break even point (in dollars) = 30,000/40%

= 75,000

(4) Required Sales revenue to earn Operating Income of ($30,000) is computed as follows:

Required Sales in dollars =[Total fixed costs+ Target Profit]/Contribution margin ratio

= [30,000+30,000]/40%

= 150,000

(5)Margin of Safety:

Sales = $120,000

Sales at Breakeven = $75,000

Margin of Safety = [Sales-Break even sales]/Sales

= [120,000-75,000]/120,000

= 37.5%

Margin of Safety(in dollars) = 45,000(120,000/37.5%)

Or Margin of Safety(in dollars) = Sales - Breakeven Sales($120,000-75,000)

(6)Margin of Safety (in units) = 2,250[45,000/Selling price per unit ($20)]

orMargin ofSafety(units) can be computed by using the following formula(Sales in units- Breakeven Sales in units)