Question

Narchie sells a single product for $90. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $630,000. Current sales total 15,000 units.

1.) Narchie:

a.) will break-even by selling 17,500 units.

b.) will break-even by selling 5,500 units.

c.) cannot break-even because it loses money on every unit sold.

d.) will break-even by selling 10,833 units.

e.) will break-even by selling 997,500 units.

2.) In order to produce a target profit of $90,000, Narchie's dollar sales must total:

a.) $20,000.

b.) an amount other than those above.

c.) $81,560.

d.) $1,745,000.

e.) $1,800,000.

3.) If Narchie sells 20,000 units, its safety margin will be:

a.) $1,125,000.

b.) $1,350,000.

c.) an amount other than those above.

d.) $225,000.

e.) $450,000.

Answer 1

1)break-even point ( in Units ) = Fixed cost / Contribution Margin Per Unit

= $630,000 /$ 36 Per Unit

= 17,500 Units

Hence the correct answer is

a.) will break-even by selling 17,500 units.

Note :

Contribution Margin Per Unit = Selling Price Per Unit - Variable Cost Per Unit

= $ 90 - ( $ 90 *60%)

= $ 36 Per Unit

2. ) target profit = $90,000

Hence, Target Contribution Margin = target profit + Fixed Cost

= $ 90,000 + $630,000

= $ 720,000

Contribution Margin Per Unit = $ 36 Per Unit

Contribution Margin Ratio = Contribution Margin / Sales *100

= $ 36 /$90 *100

= 40%

Hence, dollar sales required to atttain the atrget profit =Target Contribution Margin /  Contribution Margin Ratio

= $ 720,000 / 40%

= $ 1,800,000

Hence the correct answer is e.) $1,800,000

3) Margin of Safety = Actual Sales - Break Even Sales

= ( 20,000 Units * $ 90 ) - ( 17,500 Units * $ 90 )

= $ 225,000

Hence the correct answer is d) $ 225,000