Question

Felde Bucket Co., a manufacturer of rain barrels, had the following data for 2018: Sales: 2,500 unitsSales price: $40 per unitVariable costs: $24 per unit Fixed costs$ 19,500 per month Instructions

(a). What is the contribution margin per unit (b). What is contribution margin ratio? (c). How many units Felde has to sell per month to be break-even? (d). What is the total sales in dollars Felde has to sell per month to be break-even? (e). What is the margin of safety in dollars and as a ratio? (f) What is the total sales in dollars that must be generated for the company to earn a profit of $60,000? Bonus Question (g) If the company wishes to increase its total dollar contribution margin by 30% in 2019, by how much will it need to increase its sales if all other factors remain constant? Show all work please

Answer 1

This problem is related to marginal costing basic-

Data given-

Sale price per unit= $40, Variable cost per unit= $26, Fixed cost per month= $19500, Sales Quantity= 2500 units

a) Calculation of contribution margin per unit

contribution margin per unit = Sale price per unit - Variable cost per unit)

                                                $40 - $24      = $16

b) Contribution margin ratio= Contribution margin / Sale price per unit *100

                                                 = $16 / $40 *100 = 40%

c) Calculation of Break even point in units= Break even point is the point at which there is no profit & no loss.

Break-even point (in units) per month = Fixed cost / (Sale price per unit - Variable cost per unit)

                                          = $19500 / ($40- $26)= 1218.75 or 1219 units

d) Break-even sales in dolar terms = Fixed cost / Contribution margin rate

                                                       = $19500 / 40% = $48750

e) Calculation of margin of safety sales in dollars and ratio- Margin of safety is point above break-even point.

Margin of safety sales (in Dollars) = (Actual Sales Quantity - Breakeven Sales Quantity)* Price per unit

(2500 - 1219) *40= $51240

                                                                               OR

                                                          Actual Sales - Break-even sales

                                                  =       (2500*40) - 48750 = $51250

Ratio of Sales= Margin of safety sales/ Total sales * 100

                              = 51250/100000 = 51.25%

f) Desired Sales to earn desired profit of $60000-

Desired sales = Fixed cost + Desired profit / Contribution margin ratio

                       = (19500 + 60000) / 40%

                       = $169500

g) Calcualtion of current total $ contribution margin= 2500* $16 = $40000

Company want's to increase it by 30% in projection so new contribution = 40000*1.30 = $52000

Calculation of Profit = Revised contribution - Fixed cost = 52000= 19500 = $32500

As other factors remain constant -

Selling price per unit will be same and variable cost per unit will remain same

As per marginal cost equation assumng sales quantity be x

Sales revenue- variable cost= fixed cost+ profit

X*(40-26) = 19500+32500

X = 52500 / 14 = 3750 units.