Question

Madison Company produces a single product which sells for $80 per unit. Fixed expenses total $18,000 per month, and variable expenses are $44 per unit. During the current month, sales, in units, totaled 700 units.

Using the information above, match each of the items listed below with the appropriate amount.

1.Contribution margin per unit.

2.Contribution margin ratio

3.Break-even point in units.

4.Break-even point in dollars.

5.Total contribution margin at the break-even point.

6.Net income during the current month.

7.Margin of safety during the current month.

8.Margin of safety rate during the current month.

9.Operating leverage during the current month.

10.Sales, in units, needed for a target profit of $9,000

11.Sales, in dollars, needed for a target profit of $8,100.

12.If sales next month increase by 100%, what will be the net income?

A. 45%

B. 750 units

C. 500 units

D. $36

E. 3.5

F. $32,400

G. 28.6%

H. $18,000

I. $58,000

J. $7,200

K.$16,000

L. $40,000

Answer 1

Answer:

1. Contribution margin per unit	D. $36
2. Contribution margin ratio	A. 45%
3. Break even point in units	C. 500 units
4. Break even point in dollars	L. $40,000
5. Total contribution margin at the break even point	H. $18,000
6. Net income during the current month	J. $7,200
7. Margin of safety during the current month	K. $16,000
8. Margin of safety rate during the current month	G. 28.6%
9. Operating leverage during the current month	E. 3.5
10. Sales in units needed for target profit of $9,000	B. 750 units
11. Sales in dollars needed for target profit of $8,100	I. $58,000
12. If sales is increased by 100%, what is the net income?	F. $32,400

Working notes:

1. contribution margin per unit = Selling price - variable expenses

= $80 - $44 = $36

2. Contribution margin ratio =( Contribution margin / Selling price) * 100 =($36 / $80) * 100 = 45%

3. Break even point in units = Fixed expenses / Contribution margin per unit = $18,000 / $36 = 500 units

4. Break even point in dollars = Fixed expenses / Contribution margin ratio = $18,000 / 45% = $18,000 / 0.45

= $40,000

5. Total Contribution margin at the break even point = Break even point in units * contribution margin per unit

= 500 units * $36 = $18,000(or, total contribution margin at break even point will be equal to fixed cost)

6. Net income during the current month = Total contribution margin for the current month - fixed expenses

(current month unit sales * contribution margin per unit) - fixed expense

= (700 units * $36) - $18,000 = $25,200 - $18,000 = $7,200

7. Margin of safety during the current month = Actual sales in dollars - Break even sales in dollars

Actual sales in dollars = Current month's unit sales * selling price = 700 units * $80 = $56,000

Break even sales in dollars = $40,000 (already calculated)

Margin of safety = $56,000 - $40,000 = $16,000

8. Margin of safety rate during the current month = (Margin of safety / Actual sales in dollars) * 100

= ($16,000 / $56,000) * 100 = 28.57 % rounded to 28.6%

9. Operating leverage during the current month = Total contribution margin for the current month / Net income

Total contribution margin = 700 units * $36 = $25,200

Net income = $7,200 (already calculated)

Operating leverage = $25,200 / $7,200 = 3.5

10. Sales in units needed for target profit of $9,000 = (fixed expenses + target profit) / contribution margin per unit

= ($18,000 + $9,000) / $36 = $27,000 / $36 = 750 units

11. Sales in dollars needed for target profit of $8,100 = (fixed expenses + target profit) / contribution margin ratio

= ($18,000 + $8,100) / 45% = $26,100 / 0.45 = $58,000

12. Net income if sales is increased by 100%;

Current sales = 700 units

If it is increased by 100%, the sales will become 1,400 units

So, sales in dollars = 1,400 units * $80 = $112,000

Total Contribution margin = Sales * contribution margin ratio = $112,000 * 45% = $50,400

Net income = Total Contribution margin - Fixed expenses = $50,400 - $18,000 = $32,400