Question

2. Cost Volume Profit Analysis or Break Even Analysis

You are given the financial information below:

Tom’s Treasures Income Statement . . .For Year Ended 12/31/17

Sales (85,000 units) . . ... . . .$5,500,000

Variable Expenses . . . . . . .$2,475,000

Contribution Margin . . . . . . . $3,025,000

Fixed Expenses. . . . . . . . . .$1,785.000

Net Operating Income . . . . . . $1,240,000

Additional Formulas Needed:

1. Sales – Variable expenses = Contribution Margin

2. B/E Units = Fixed Costs / CM per unit

3. B/E $ = B/E Units x Sales price per unit

4. B/E $ = Fixed Costs / CM ratio

5. Safety Margin = Budgeted sales – Breakeven sales

6. Sales – Total Variable Cost– Total Fixed Cost = Profit (Income)

7. Sales – Variable Cost = CM; CM – Fixed Costs = Profit (Income)

8. Sales (units) = Fixed Costs+ target net profit / CM/unit

Calculate the following:

A) Compute the Income Statement on a per unit basis and as a percent of sales and provide

that information in two columns to the right of the total dollar information provided.

B) Calculate the sales price per unit and the variable expenses per unit

C) Compute the company’s contribution margin ratio.

D) Compute the company’s break-even point in units.

E) Compute the company’s break-even point in dollars.

E) Calculate the company’s margin of safety in dollars.

F) Assume that next year, management wants to earn a profit of $2,000,000. How many units

must be sold to reach this target profit?

Answer 1

A.Income Statement

                                      $                 Percentage(%)

Sales Price                     64.70

Less : Variable Costs     29.11          45%

Contribution                            35.59          55%

B. sales price per unit and the variable expenses per unit

Sales Price per unit        = $ 55,00,000 / 85000

                                      = $ 64.7 per unit

Variable cost per unit    = $ 2475000 / 85000

                                      = $ 29.11 per unit

C. company’s contribution margin ratio

contribution margin ratio = Contribution rate / Sales price * 100

                                      = 35.59 / 64.7 * 100

                                      = 55%

D. company’s break-even point in units.

break-even point in units = Fixed Costs / Contribution per unit

                                      = $ 1785000 / $ 35.59

                                      = 50,154 Units

E. company’s break-even point in dollars

break-even point in dollars = Fixed Costs / Contribution Margin ratio

                                      = $ 1785000 / 55%

                                      = $ 32,45,454

F. company’s margin of safety in dollars

margin of safety in dollars = Actual Sales – Break-Even sales

                                      = $ 55,00,000 - $ 32,45,454

                                      = $ 22,54,546

G. units must be sold to reach this target profit

Units to be sold = ( Fixed Costs + Target Profit ) / Contribution per unit

                             = ($17,85,000 + $ 20,00,000 ) / $ 35.59

                             = 1,06,350 Units