Question

In: Accounting

Quiz Company sells its product for $10 per unit. Variable costs are $6 per unit and...

Quiz Company sells its product for $10 per unit. Variable costs are $6 per unit and fixed costs are $15,000 per week. During the third week of July, Quiz Company sold 5,000 units.

1. Determine the number of units Quiz Company must sell to earn operating income of $8,000.

2. Determine the sales revenue (in dollars) Quiz Company must generate to break even.

3. Determine the sales revenue (in dollars) Quiz Company must generate to earn operating income of $8,000.

4. Determine the margin of safety in units for the week.

5. Determine the margin of safety in dollars for the week.

6. Suppose Quiz Company increased spending for advertising by $2,500 per week. As a result, sales in the fourth week increased by $5,000 compared to the third (current) week.

Determine the operating income earned in the fourth week.

Note: Give your answer using dollar signs and commas but no decimal points (cents).

Example: $12,345

Solutions

Expert Solution

1.

Desired sales units = Fixed costs+Target operating income / Contribution margin per unit

Desired sales units = $15,000+8,000 / $4 (10-6) = 5,750 units

2.

Break even point in sales dollars = Fixed cost / Contribution margin ratio

Break even point in sales dollars = $15,000 / 40% (4/10*100)

Break even point in sales dollars = $37,500

3.

Desired sales revenue = Fixed costs+Target operating income / Contribution margin ratio

Desired sales revenue = $15,000+8,000 / 40%

Desired sales revenue = $57,500

4.

Margin of safety in units = Current sales unit - Breakeven units

Breakeven units = Fixed cost / Contribution margin per unit

Breakeven units = $15,000 / $4 = 3,750 units

Margin of safety in units = 5,000 - 3,750 = 1,250 units

5.

Margin of safety in dollars = Current sales level - Breakeven sales level

Margin of safety in dollars = $50,000 (5,000*$10) - $37,500

Margin of safety in dollars = $12,500

6.

Fixed cost for fourth week = $15,000+2,500 = $17,500

Sales for fourth week = $50,000+5,000 = $55,000

Operating income earned = Contribution margin - Fixed cost

Operating income earned = ($55,000 * 40%) - $17,500

Operating income earned = $22,000 - 17,500 = $4,500

ekkarill92 answered 2 years ago
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