Question

Parrott Company operates with a single product. The following simple income statement relates to last year when sales units totaled    20,000.

                                           Total $             Per unit $

Sales                                  270,000               13.50

Variable expense               180,000                 9.00

Contribution margin           90,000                 4.50

Fixed expenses                   49,500

Net operating income         40,500

a. What is Parrott Company's breakeven point in units and $ ?

b. What was Parrott Company's margin of safety for last year in percentage, units, and dollars?

c. If Parrott increased quality by using materials that would raise its variable expense per unit by $0.50, complete a new income statement for Parrott if they sold 12% more units this year.

Answer 1

Answer-a)- Break-even point in units =11000 units.

Break-even point in $ = $148500.

Explanation- Break-even point in units = Fixed costs/Contribution margin per unit

= $49500/$4.50 per unit

= 11000 units

Break-even point in $ = Break-even point in units*Selling price per unit

= 11000 units*$13.50 per unit

= $148500

b)- Margin of safety in units = Total sales units – Break-even sales units

= 20000 units -11000 units

= 9000 units

Margin of safety in $= Margin of safety in units* Selling price per unit

= 9000 units*$13.50 per unit

= $121500

Margin of safety in % = (Margin of safety in units/ Total sales units)*100

= (9000 units/20000 units)*100

= 45%

c)-

PARROTT COMPANY
Contribution margin Income Statement
Particulars		Amount
		$
Sales	(20000 units*1.12)*$13.50 per unit	302400
Less:- Variable cost	22400 units*($9.00 +$0.50)	212800
Contribution		89600
Less:- Fixed costs		49500
Net operating income		40100