Question

Problem 5-3 Determine break-even point under varying assumptions (L.O. 3, 4)

The management of Bootleg Company wants to know the break-even point for its new line of hiking boots under each of the following independent assumptions. The selling price is $50 per paid of boots unless otherwise stated. (Each pair of boots in one unit.)

Fixed costs are $300,000; variable cost is $30 per unit
Fixed costs are $300,000; variable cost is $20 per unit
Fixed costs are $250,000; variable cost is $20 per unit
Fixed costs are $250,000; selling price is $40; and variable cost is $30 per unit

Compute the break-even point in units and sales dollars for each of the four independent cases.

Problem 5-4 Determine the margin of safety (L.O. 5)

Refer to Problem 5-3. Bootleg Company’s sales are $1,100,000. Determine the margin of safety in dollars for cases (a) through (d).

Problem 5-5 Compute the level of sales dollars needed to achieve a specified level of income (L.O. 6)

Using the data in Problem 5-3 (a through d), determine the level of sales dollars required to achieve a net income of $125,000.

Answer 1

		SITUATION   1	SITUATION   2	SITUATION    3	SITUATION    4
a	SELLING PRICE PER UNIT	50	50	50	40
b	VARIABLE COST PER UNIT	(30)	(20)	(20)	(30)
c = a-b	CONTRIBUTION PER UNIT	20	30	30	10
d = (c/a)*100	PROFIT VOLUME RATIO	40%	60%	60%	25%
e	FIXED COST	300000	300000	250000	250000
f = (e/c)	BREAK EVEN POINT (UNITS)	15000	10000	8333	25000
g = (e/d)	BREAK EVEN POINT (SALES)	750000	500000	416667	1000000

Break even point (units) = Fixed Cost / Contribution per unit

Break even point (sales) = Fixed Cost / Profit Volme Ratio

		SITUATION   1	SITUATION   2	SITUATION    3	SITUATION    4
a	SALES	1100000	1100000	1100000	1100000
b	BREAK EVEN POINT (SALES)	750000	500000	416667	1000000
c = a-b	MARGIN OF SAFETY	350000	600000	683333	100000

Margin of Safety = Sales - Break Even Sales

(Note: Break Even sales calculated in Table 1 above )

		SITUATION   1	SITUATION   2	SITUATION    3	SITUATION    4
a	FIXED COST	300000	300000	250000	250000
b	EXPECTED PROFIT	125000	125000	125000	125000
c	PROFIT VOLUME RATIO	40%	60%	60%	25%
d = (a+b)/c	LEVEL OF SALES REQUIRED	1062500	708333	625000	1500000

Level of Sales required = (Fixed Cost + Expected Profit) / Profit Volme Ratio