Question

5.

After earning a loss of $6,000 from operations in 20Y5, the production manager would like to know the break-

even point in sales dollars and units for the company. During 20Y5, the company sold 6,000 at $3 each. Variable

costs for the year totaled $10,800. Determine the break-even point in dollars and units.

6.

Would each of the following cause the break-even point to increase or decrease?

a.

Decrease in selling price of $5 per unit

b.

Decrease in variable costs of $1 per unit

c.

Increase in fixed costs by $12,000

7.

With the information shown below, calculate the operating leverage for the company, rounding to two decimal

places. Also, determine the income from operations if there was a 10% increase in sales.

Sales

$300,000

Variable costs

112,000

Contribution margin

$188,000

Fixed costs

79,000

Income from operations

$109,000

8.

ABC Corporation has a break-even point of 2,000 units, which sell for $5 each. The company made total sales of

$75,000 each. Calculate the company’s margin of safety in dollars, units, and percent of current sales.

Answer 1

5
	Per unit	Total 6000 units
Sales	3	18000
Less: Variable expenses	1.8	10800
Contribution margin	1.2	7200
Fixed costs = 7200+6000 = $13200
CM ratio = 1.2/3= 40%
Break-even point in dollars = Fixed costs/CM ratio = 13200/40%= $33000
Break-even point in units = Fixed costs/Unit contribution margin = 13200/1.2= 11000
6
Decrease in selling price of $5 per unit-Break even point increase
Decrease in variable costs of $1 per unit-Break even point decrease
Increase in fixed costs by $12,000-Break even point increase
7
Operating leverage = Contribution margin/Income from operations = 188000/109000= 1.72
Income from operations after 10% increase in sales = 109000+(188000*10%)= $127800
8
Margin of safety in dollars = 75000-(2000*5) = $65000
Margin of safety in units = (75000/5)-2000= 13000
Percent of current sales = 65000/75000= 87% or 86.67%