Question

Frisch Corporation produces and sells a single product. Data concerning that product appear below:

• Selling price per unit $ 170
• Variable expense per unit $ 80
• Fixed expense per month $ 140,000

Required:

Given the present situation, compute

a. The break-even sales in units.

b. The break-even sales in dollars.

c. The sales in dollars that would be required to produce a net operating income of $100,000. (1 Mark)

d. The margin of safety in dollars if the company’s actual sales are $350,000. (1 Mark)

Answer 1

a) Break even sales in units = Fixed cost / Contribution margin per unit

Fixed cost = $140,000

Contribution margin per unit = Selling price per unit - Variable expense per unit

Selling price per unit = $170 Variable expense per unit = $80

Contribution margin per unit = $170 - $80 = $90

Break even sales in units = $140,000 / $90 = 1,555.55 rounded to 1,556 units

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

Fixed cost = $140,000

Contribution margin ratio = Contribution margin / Selling price

Contribution margin = $90 Seliing price = $170

Contribution margin ratio = $90 / $170 = 0.5294

Break even sales in dollars = $140,000 / 0.5294 = $264,450.32 rounded to $264,450

(contribution margin ratio is taken as 4 digits after the decimal point to get the accurate results)

c) Sales in dollars required to produce a net operating income of $100,000

= (fixed cost + target profit) / contribution margin ratio

Fixed cost = $140,000

Target profit = $100,000

Contribution margin ratio = 0.5294

Required sales in dollars to get $100,000 as net operating income = ($140,000 + $100,000) / 0.53

= $240,000 / 0.5294 = $453,343

d) Margin of safety in dollars = Actual sales - Break even sales in dollars

Actual sales = $350,000

Break even sales in dollars = $264,450

Margin of safety in dollars = $350,000 - $264,450 = $85,550