Question

Wyatt Inc., a multinational manufacturing firm involved in production of architectural millwork like custom molding, panels, book cases and others. Suppose that the Wyatt Inc. is involved in the production of the molding and it is expected to maintain same inventory at the end of the year as at the beginning of the year. Let us suppose the estimated fixed cost is $288, 000, and the estimated variable costs per unit are $14. Also assume that 60,000 units will be sold at price of $20 per unit (Waren). The maximum sales within the relevant range are 70,000 units.

Calculate the following:

Questions

Calculate the contribution margin ratio and unit contribution margin.

Find out the break-even point in units.

Determine the margin of safety.

Draw a Cost-Volume-Profit graph and attach it to your posting.

What are some things that would increase the break-even in units?

Answer 1

Contribution Margin Ratio = Contribution Margin /sales
Contribution Margin =	Selling Price per unit - variable cost per unit
Selling Price per Unit =	20
variable Cost per Unit =	14
C.M per Unit =		6
C.M.R =		0.3	(6/20)

Break Even Point In Units =	Fixed Cost /Contribution Margin Per unit
Fixed Cost =		288000
C.M per Unit =		6	(20-14)
B.E.P IN UNITS =		48000 units	(288000/6)

Margin Of Safety = Actual Sales- B.E.P sales
Actual sales =	60000
B.E.P Sales =	48000
M.O.S =	12000	(60000-48000)

In The above Graph , the X axis represents sales volume while the y axis represents total cost.

We can see that as the sales volume (blue line) increases the total cost (violet line) also increases. This is because of the increase in the variable cost as the volume increases .

Fixed cost (red line) does not change and remain constant within the relevent range irrespective of the increase in sales volume.

Some Things That would increase the break even units are as follows :

• Increase in fixed cost
• Increase in variable cost
• Decrease in Selling price
• Decrease in Contribution Margin
• Poor sales mix