Question

Break-Even Units and Sales Revenue: Margin of Safety

Dupli-Pro Copy Shop provides photocopying service. Next year, Dupli-Pro estimates it will copy 2,990,000 pages at a price of $0.06 each in the coming year. Product costs include:

Direct materials	$0.009
Direct labor	$0.003
Variable overhead	$0.001
Total fixed overhead	$83,960

There is no variable selling expense; fixed selling and administrative expenses total $42,000.

Required:

In your computations that involve the contribution margin ratio, do not round the ratio.

1. Calculate the break-even point in units.
fill in the blank 1 units

2. Calculate the break-even point in sales revenue.
$fill in the blank 2

3. Calculate the margin of safety in units for the coming year.
fill in the blank 3 units

4. Calculate the margin of safety in sales revenue for the coming year.
$fill in the blank 4

5. What if the total selling and administrative expenses are reduced to $26,020? Recalculate the following:

a. Break-even point in units	fill in the blank 5	units
b. Break-even point in sales revenue	$fill in the blank 6
c. Margin of safety in units for the coming year	fill in the blank 7	units
d. Margin of safety in sales revenue for the coming year	$fill in the blank 8

Answer 1

Selling Price Per Units = $0.06

Variable Price Per Unit = Direct Material Per Unit + Direct Labor Per Unit + Variable Overhead Per Unit

= $0.009 + $0.003 + $0.001

= $0.013

Fixed Cost = Fixed Overhead + Fixed Selling and Administrative Expenses

= $83,960 + $42,000

= $125,960

Contribution Margin Per Unit = Selling Price Per Unit - Variable Cost Per Unit

= $0.06 - $0.013

= $0.047

1. Break-Even Point in Units = Fixed Cost / Contribution Margin Per Unit

= $125960 / $0.047

= 2,680,000

2. Break-Even Point in Sales = Break-Even Point in Units * Selling Price Per Unit

= 2,680,000 * $0.06

= $160,800

3. Margin of Safety in Units = Actual Sales in Units - Break-Even Point in Units

= 2,990,000 - 2,680,000

= 310,000

4. Margin of Safety in Revenue = Margin of Safety in Units * Selling Price Per Unit

= 310,000 * $0.06

= $18,600

5. Fixed Cost = Fixed Overhead + Fixed Selling and Administrative Expenses

= $83,960 + $26,020

= $109,980

a. Break-Even Point in Units = Fixed Cost / Contribution Margin Per Unit

= $109,980 / $0.047

= 2,340,000

b. Break-Even Point in Sales = Break-Even Point in Units * Selling Price Per Unit

= 2,340,000 * $0.06

= $140,400

c. Margin of Safety in Units = Actual Sales in Units - Break-Even Point in Units

= 2,990,000 - 2,340,000

= 650,000

d. Margin of Safety in Revenue = Margin of Safety in Units * Selling Price Per Unit

= 650,000 * $0.06

= $39,000