Question

Chartered Carriers sells high end handbags to foreign clients online and local clients. They sell each handbag for $200 incl. of taxes. Their projected annual sales are 75,000 handbags. The projections for the online sales are: Sales Revenue $ 5,500,000 Variable Costs $ 850,000 Fixed Costs $ 3,162,000 $4,012,000 Operating Income $1,488,000 Analysis of operations in the foreign market will incur variable costs of $33 per unit and fixed costs of $3,320,000. The selling price remains at $95. Required: a. Using the contribution margin per unit, calculate the number of handbags that must be sold in foreign market for the company to break even. b. Compute the Margin of Safety and Margin of Safety ratio for the Online market. c. Using the contribution margin ratio, determine the level of sales that would be required to generate a target income of $1,000,000 at the Local market.

Answer 1

(a)-The number of handbags that must be sold in foreign market for the company to break even

The number of handbags that must be sold in foreign market for the company to break even = Fixed Costs / Contribution Margin per unit

= $33,20,000 / ($95 per unit - $33 per unit)

= $33,20,000 / $62 per unit

= 53,548 Handbags

(b)-The Margin of Safety and Margin of Safety ratio for the Online market.

Margin of Safety = Actual Sales – Breakeven Sales

Contribution Margin Ratio = [(Sales – Variable cost) / Sales] x 100

= [($55,000 – 850,000) / 55,00,000] x 100

= [$46,50,000 / 55,00,000] x 100

= 84.5455%

Breakeven Sales = Fixed Costs / Contribution Margin Ratio

= $31,62,000 / 0.845455

= $37,40,000

Margin of Safety

Margin of Safety = Actual Sales – Breakeven Sales

= $55,00,000 – 37,40,000

= $17,60,000

Margin of Safety Ratio

Margin of Safety Ratio = [Margin of safety / Actual sales] x 100

= [$17,60,000 / 55,00,000] x 100

= 32%

(c)- The level of sales that would be required to generate a target income of $1,000,000 at the Local market

The level of sales that would be required to generate a target income of $1,000,000 at the Local market = [Fixed Cost + Desired Profit] / Contribution Margin Ratio]

= [$31,62,000 + 10,00,000] / 0.8455455

= $41,62,000 / 0.845455

= $49,22,796