Question

Cost—Volume—Profit Equation, Basic Concepts, Solving for Unknowns (LO 1,2,3 and 5) Goldilocks Company produces high-end combination shampoos and conditioners in individual-use bottles for hotels. Each bottle sells for $0.90. The variable costs for each bottle (materials, labour, and overhead) total $0.63. The total fixed costs are $210,600. During the most recent year 830,000 bottles were sold. Required: 1. What is the BEP in units for Goldilocks? What is the margin of safety in units for the recent year? 2. Prepare an income statement for Goldilocks's most recent year. 3. How many units must be sold for Goldilocks to earn a profit of $40,500? 4. Using the contribution margin percentage approach, what is the level of sales dollars needed for Goldilocks to earn operating income of 20 percent of sales?

Answer 1

Answer 1.

Selling Price per unit = $0.90
Variable Cost per unit = $0.63
Fixed Costs = $210,600

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $0.90 - $0.63
Contribution Margin per unit = $0.27

Breakeven Point in units = Fixed Costs / Contribution Margin per unit
Breakeven Point in units = $210,600 / $0.27
Breakeven Point in units = 780,000

Margin of Safety in units = Sales in units - Breakeven Point in units
Margin of Safety in units = 830,000 - 780,000
Margin of Safety in units = 50,000

Answer 2.

Answer 3.

Required Sales in unit = (Fixed Costs + Target Profit) / Contribution Margin per unit
Required Sales in unit = ($210,600 + $40,500) / $0.27
Required Sales in unit = 930,000

Answer 4.

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $0.27 / $0.90
Contribution Margin Ratio = 30% of sales

Operating Income = 20% * Sales
Contribution Margin - Fixed Costs = 20% * Sales
30% * Sales - $210,600 = 20% * Sales
10% * Sales = $210,600
Sales = $2,106,000