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In: Accounting

McKnight is evaluating a business opportunity to sell grooming kits at dog shows. Gary can buy...

McKnight is evaluating a business opportunity to sell grooming kits at dog shows. Gary can buy the grooming kits at a wholesale cost of $ 35 per set. He plans to sell the grooming kits for $ 90 per set. He estimates fixed costs such as travel? costs, booth rental? cost, and lodging to be $ 1 comma 210 per dog show. Requirements 1. Determine the number of grooming kits Gary must sell per show to breakeven. 2. Assume Gary wants to earn a profit of $ 990 per show. a. Determine the sales volume in units necessary to earn the desired profit. b. Determine the sales volume in dollars necessary to earn the desired profit. c. Using the contribution margin? format, prepare an income statement? (condensed version) to confirm your answers to parts a and b. 3. Determine the margin of safety between the sales volume at the breakeven point and the sales volume required to earn the desired profit. Determine the margin of safety in both sales? dollars, units, and as a percentage. Requirement 1. Determine the number of grooming kits Gary must sell per show to breakeven. Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. ( + ) / = Sales in units

Solutions

Expert Solution

1. Breakeven (in units) = fixed cost / contribution margin Per unit

Contribution margin Per unit = selling price per unit - variable cost per unit = 90-35 = 55

Breakeven (in units) =1210/55 = 22 grooming kits

2. A. Required sales volume in units = desired profit + Fixed cost / contribution margin Per unit

= (990+1210)/55 = 40 grooming kits

2. B. Required sales volume in dollars = desired profit + Fixed cost / contribution margin ratio

Contribution margin ratio = (selling price per unit - variable cost per unit) / selling price per unit = (90-35)/90 = 61.11%

Required sales volume in dollars = 990+1210 /61.11% = $3600

2. C. Income statement

Sales (40*90) 3600
Less: variable cost (40*35) 1400
Contribution margin 2200
Less: fixed cost 1210
Net operating income 990

3. Margin of safety in units = sales volume in units required to earn desired profit - breakeven in units = 40-22 =18

Margin of safety in dollars = sales volume in dollars required to earn desired profit - breakeven in dollars = 3600-(1210*90/55) =3600-1980 = 1620

Margin of safety (in percentage) = sales volume in units required to desired profit / Breakeven volume in units = 22/40 =55%

ekkarill92 answered 1 year ago
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