Question

Sherpa Manufacturing has the following income statement for 6,000 units: Sales $600,000 Variable costs 360,000 Contribution margin 240,000 Fixed costs 80,000 Net income $160,000 (a) At what sales volume (in sales dollars) does Sherpa break even? (b) At what sales volume (in units) does Sherpa break even? (c) Given the income statement above, compute the margin of safety. (d) What level of sales volume must be attained to reach net income of $200,000? (e) What level of sales volume must be attained to reach net income of $180,000, assuming Sherpa had to pay income taxes at a rate of 40%?

Answer 1

• All working forms part of the answer
• Requirement ‘a’

A	Contribution margin	$        240,000
B	Sales	$        600,000
C = A/B	Contribution margin per unit	40%
D	Fixed Cost	$          80,000
E = C/D	Sales Dollars required to break even	$        200,000 = Answer

• Requirement ‘b’

A	Contribution margin	$              240,000
B	Units sold	6,000
C = A/B	Contribution margin per unit	$                         40
D	Fixed Cost	$                80,000
E = C/D	Sales Volume required to break even	2,000 units = Answer

• Requirement ‘c’

--You have not mentioned if MoS is required in Dollar amount or Units, so I’ve given answer in both – Dollar amounts and Units

Working		Amount	Units
A	Sales	$              600,000	6,000
B	Break Even Point	$              200,000	2,000
C = A - B	Margin of Safety	$              400,000	4,000 units

• Requirement ‘d’

A	Target Net Income	$              200,000
B	Fixed cost	$                80,000
C = A+B	Total Contribution margin required	$              280,000
D	Contribution margin per unit	$                         40
E = C/D	Sales Volume required	7,000 units = Answer

• Requirement ‘e’

A	Target Net Income [after tax]	$        180,000
B = A/60%	Target Net Income [before tax]	$        300,000
C	Fixed cost	$          80,000
D = B+C	Total Contribution margin required	$        380,000
E	Contribution margin per unit	$                   40
F = D/E	Sales Volume required	9,500 units = Answer