Question

“You Rang?” manufactures and sells boomerangs. The company’s contribution format income statement for the month of September is given below. The company is looking to make a profit of $80,000 for the month. Total Per Unit Sales (8,000 units) $160,000 $20.00 Less Variable Expenses $96,000 $12.00 Contribution Margin $64,000 $8.00 Less Fixed Expenses $34,000 Operating Income $30,000 Compute the following: 1. The Contribution Margin Ratio for “You Rang?” – 1 Mark

2. The company’s break-even point in both units and sales dollars. – 3 Marks

3. The Target Operating Profit for “You Rang?” in both units and sales dollars. – 3 Marks

4. The company’s Margin of Safety expressed in units, sales dollars, and as a percentage. – 3 Marks

Make sure to show ALL work! A majority of the marks are based on the work, not the final answer. To receive full credit for each question, you must show your work, and round your final answers to 2 decimal points correctly.

Answer 1

		Per Unit($)	Units	Total(Unit*Per unit )
	Sales	20	8000	160000
Less:	Varible expenses	12	8000	96000
	Contribution margin	8	8000	64000
Less	Fixed Expenses	34000
	Operating income	30000

(1) Contribution Margin Ratio=  [Contribution margin / sales ] * 100

=>Contribution Margin Ratio = [$64000/$160000] *100 = 40%

(2)

Breakeven point in units means the level of unit sales at which there will no gain and loss. Means Operating income will be NIL.

Break even points in units = Fixed Cost / Contribution margin per unit

=>Break even points in units = $34000 / $8 per unit = 4250 Units.

Break even point in sales Dollar = Breakeven point in units * sales price per unit

=>Break even point in sales Dollar = 4250 Units *$20 per unit = $85000

Proof-

	Operating income at 4250 units level
		Per Unit($)	Units	Total(Unit*Per unit )
	Sales	20	4250	85000
Less:	Varible expenses	12	4250	51000
	Contribution margin	8	4250	34000
Less	Fixed Expenses	34000
	Operating income	0

(3)

Targeted operating profit is $80,000 per month.

Dollar sales to achive targeted operating profit = [Fixed cost+Targeted profit] / Contribution Margin Ratio

=>Dollar sales to achive targeted operating profit = [$34000+$80000] / 40%

=>Dollar sales to achive targeted operating profit= $285000

Unit sales to achive targeted profit = [Fixed cost+Targeted profit] / Contribution Margin Per unit

=>Unit sales to achive targeted profit = [ $34000+$80000] / $8 per unit

=>Unit sales to achive targeted profit= 14250 Units.

Proof-

	Operating income at 14250 units level
		Per Unit($)	Units	Total(Unit*Per unit )
	Sales	20	14250	285000
Less:	Varible expenses	12	14250	171000
	Contribution margin	8	14250	114000
Less	Fixed Expenses	34000
	Operating income	80000

(4) Margin of saftety is the difference between the actual sales and the breakeven sales.

Margin of safety in units = Current sales units- break even sales units = 8000 units- 4250 Units = 3750 Units

Margin of safety in dollar = current $ sales - Breakeven dollar sales = $160000-$85000 = $75000

Margin of safety as a percentage of sales = [(current sales level-breakeven sales ) / current sales level] *100

=>Margin of safety as a percentage of sales = [($160000-$85000) / $160000 ] * 100 = 46.875%