AD Company estimates that variable costs will be 70% of sales and fixed costs will total...

AD Company estimates that variable costs will be 70% of sales and fixed costs will total $1,800,000. The selling price of the product is $10, and 700,000 units will be sold.

Instructions: Using the mathematical equation
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute net income.

Expert Solution

a) break even point in units=fixed costs/contribution perunit=$1800000/$3=600000 units

contribution perunit=sales-variable cost per unit=$10-70%x$10=$3

break even point in dollar sales=fixed costs/pv ratio=$1800000/30%=$6000000

pv ratio=contribution/sales=$3/$10=30%

b) margin of safety sales=actual sales-break even sales=700000 units x $10-$6000000=$1000000

margin of safety ratio=margin of safety sales/actual sales=$1000000/$7000000=14.28%

c)

particulars		amount($)
sales	700000x$10	7000000
less:variable costs	70% x 7000000	4900000
contribution		2100000
less:fixed costs		1800000
net income		300000

ekkarill92 answered 2 years ago

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