Question

Sandy Bank, Inc., makes one model of wooden canoe. and, the information for it follows:

Number of canoes produced and sold		400		600		750
Total costs
Variable costs	$	54,000	$	81,000	$	101,250
Fixed costs	$	60,000	$	60,000	$	60,000
Total costs	$	114,000	$	141,000	$	161,250
Cost per unit
Variable cost per unit	$	135.00	$	135.00	$	135.00
Fixed cost per unit		150.00		100.00		80.00
Total cost per unit	$	285.00	$	235.00	$	215.00

Sandy Bank sells its canoes for $375 each.

Required:

1. Suppose that Sandy Bank raises its selling price to $500 per canoe. Calculate its new break-even point in units and in sales dollars.

2. If Sandy Bank sells 690 canoes, compute its margin of safety in dollars and as a percentage of sales. (Use the new sales price of $500.)

3. Calculate the number of canoes that Sandy Bank must sell at $500 each to generate $100,000 profit.

Answer 1

1) Contribution per unit = Selling price per unit - Variable cost per unit = $ 500 - $ 135 = $ 365

CM ratio = [ Contribution per unit / Selling price per unit ] X 100 % = [ $ 365 / $ 500 ] X 100 % = 73%

Break even point in units = Fixed cost / Contribution per unit = $ 60,000 / $ 365 = 164.38 units or 164 units (Approximately)

Break even point in sales dollars = Fixed cost / CM ratio = $ 60,000 / 73% = $60,000 X 100/73 = $ 82,191.78 or $ 82,192 ( Approximately )

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

Margin of safety in dollars = [690 X $ 500] - $ 82,192 = $ 345,000 - $ 82,192 = $ 262,808

Margin of safety as a percentage of sales = [ Margin of safety in dollars / Actual sales in dollars ] X 100 % = [ $ 262,808 / $ 345,000 ] X 100% = 76.18 %

3) Required sales units = [ Fixed cost + Targeted profit ] / Contribution per unit

Required sales units = [ $ 60,000 + $ 100,000] / $ 365 = $ 160,000 / $ 365 = 438.36 units or 438 units .

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