Question

Jack's Guitars sells guitars and accessories. One of the company's products, a Gibson guitar, sells for $1,200 per guitar. Variable expenses are $700 per guitar and fixed expenses associated with this model of guitar total $80,000 per month.

Required:
1) What is the breakeven point in unit sales?
2) What is the breakeven point in sales dollars?
3) If the company is currently selling 185 units, what is the margin of safety in both dollar and percentage terms? 4) How many units would have to be sold each month to attain a target profit of $50,000?

Answer 1

1) Breakeven units = Fixed cost / Contribution per unit

=$ 80,000 / ($1200-$700)

= 160 units

2)breakeven point in sales dollars =Breakeven units*selling Price per unit

=160 Units*$1200

= $ 192,000

3)a) Margin of safety = Actual Sales – sales at BEP

=($1200*185 unit)-$192,000

= $ 30,000

b)margin of safety in percentage =Margin of safety $ /Expected Sale in $*100

=$30,000/$222,000 *100

= 13.51%

(Fixed Cost+ required Profit)/Contribution margin ratio

4). Units to make and sell to earn profit ($50,000)= (Fixed Cost+ required Profit)/Contribution per unit

=($80,000+$50,000)/$500

=260 Units