Question

Zebra Company manufactures custom-designed skins (covers) for iPods® and other portable MP3 devices. Variable costs are $12.00 per custom skin, the price is $20, and fixed costs are $144,800. Required:

1.What is the contribution margin for one custom skin? Round your answer to the nearest cent. $ per custom skin

2. How many custom skins must Zebra Company sell to break even? custom skins

3. If Zebra Company sells 19,000 custom skins, what is the operating income? $

4. Calculate the margin of safety in units and in sales revenue if 19,000 custom skins are sold. Margin of safety in units units Margin of safety in sales revenue $

Answer 1

Variable cost = $12

Sale price = $20

Fixed cost = $144,800

1.

Contribution margin for one custom skin = Sales price - Variable cost

= 20-12

= 8 per custom skin

2.

Break even sales in units = Fixed costs/Contribution margin

= 144,800/8

= 18,100 custom skins

3.

Income Statement
Sales (19,000 x 20)	380,000
Variable cost (19,000 x 12)	228,000
Contribution margin	$152,000
Fixed costs	-144,800
Net operating income	$7,200

the operating income is $7,200, if Zebra Company sells 19,000 custom skins

4.

Contribution margin for one custom skin = Sales price - Variable cost

= 20-12

= 8 per custom skin

Contribution margin ratio = Contribution margin for one custom skin/ Sales price

= 8/20

= 40%

Break even sales in units = Fixed costs/Contribution margin

= 144,800/8

= 18,100 custom skins

Break even sales in dollars = Fixed costs/Contribution margin ratio

= 144,800/40%

= $362,000

Margin of safety in units = Actual units - Break even units

=19,000- 18,100

= 900 units

Actual sales = Sales units x Sales price per skin

= 19,000 x 20

= 380,000

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

= 380,000-362,000

= $18,000

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