Question

Sandy Bank, Inc., makes one model of wooden canoe. Partial information is given below. Required:

1. Complete the following table.

# of Canoes Produced & Sold	440	610	780
Total Costs
Variable Costs	$67,320
Fixed Costs	146,520	146,520	146,520
Total Costs	$213,840	$	$
Cost per Unit
Variable Cost per Unit	$153
Fixed Cost per Unit	333

Total Cost per Unit $486

2. Suppose Sandy Bank sells its canoes for $510 each. Calculate the contribution margin per canoe and the contribution margin ratio.

3. This year Sandy Bank expects to sell 810 canoes. Prepare a contribution margin income statement for the company.

4. Calculate Sandy Bank’s break-even point in units and in sales dollars.

5. Suppose Sandy Bank wants to earn $84,000 profit this year. Calculate the number of canoes that must be sold to achieve this target.

Answer 1

Break even point is the point which is used to find out the level of sales which will the bring the cost incurred on the production equals to the revenue generated by those sales. It is a very useful tool in cost management.

1. The table is completed

2. Contribution margin per unit formula would be = Selling price per unit – Variable cost per unit

Selling price unit = $510

Variable cost per unit = $153

Contribution margin per unit = 510 - 153 = $357

Contribution margin ratio = (Sales price per unit – variable cost per unit) ÷ Sales price per unit

Selling price per unit – Variable cost per unit = 510 - 153 = 357

Contribution margin ratio = 100 × 357 / 510 = 70%

3. Contribution margin income statement

Sales(810 × 510)................................4,13,100
less variable expense(810 × 153).....1,23,930
Contribution margin...........................2,89,170
less fixed expense..............................1,46,520
Net income.........................................1,42,650

4. Break even Point in units = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

Fixed costs = $1,46,520

Sales price per unit = $510
Variable costs per unit = $153

Break even Point in units = 1,46,520/ (510 - 153)
= 1,46,520 / 357 = 410 units

Break even sales in dollars = Break even point in units × Sales price per unit = 410 × 510 = $209,100

5. Number of units to be sold to achieve given profit:

Units to be sold = (Fixed assets + Expected profit) / Contribution per unit

Expected profit = $84,000
Fixed assets = $146,520
Contribution per unit = $510 - $153 = $357

Units to be sold = (146,520 + 84,000) / 357 = 646 units.