Question

Davies shows the following information for the next year for its single product, ceramic pots.

Selling price: $15 per unit

Variable cost: $12 per unit

Fixed cost = $42,000

Requirement 1: Compute the break-even point in units and sale dollars. Show your computations (6 points)

Requirement 2: What amount of sales revenue would Davies need to realize next year in order to generate a net income of $60,000 after tax (assume a tax rate of 20%). Show your computations (10 points)

Requirement 3: Using the sales revenue computed in #2, compute the margin of safety in sales dollars.

Answer 1

Requirement 1
Selling price	$                15
Variable cost	$                12
Contribution per Unit	$                  3
Fixed Cost	$        42,000
Breakeven Point ion Units (42000/3)	14,000

Requirement 2
Sales(468000+117000)	$     585,000
Variable Cost(117000/20*80)	$     468,000
Contribution	$     117,000
Fixed Cost	$        42,000
Profit Before Tax(60000+15000)	$        75,000
Tax(60000/80*20)	$        15,000
Net Income	$        60,000

For the better understanding look at the above table from bottom to top.

Selling price	15
Variable cost	12
Contribution per Unit	3
Contribution %(3/15)	20%

Requirement 3
Margin of safety	=	(Current sales- Breakeven Sales)/Current Sales
Margin of safety	=	(585000-14000*15)/585000
Margin of safety	=	64%

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