Exercise 5 Magnolia Company is considering the production and sale of a new product with the...

Exercise 5

Magnolia Company is considering the production and sale of a new product with the following sales and cost data: unit sales price, $350; unit variable costs, $180; total fixed costs, $399,500; and projected sales, $910,000. Round your answers to the nearest whole unit or dollar.

(a) Calculate break-even in units.

(b) Calculate break-even in dollars (use four decimal places when calculating the contribution margin ratio).

(c) Calculate number of units that would need to be sold to generate an after-tax profit of $420,000 assuming a 30% tax rate.

(d) Calculate dollar sales that would be needed to generate the same profit as above.

(e) Calculate the margin of safety stated as a percentage using the $910,000 projected sales level.

Be sure to label each calculation and show all calculations.

Solutions

Expert Solution

a) Calculation of break even point in units:

Contribution per unit= Selling price- variable cost per unit
= 350-180=$170

Break even sale in units= Fixed cost/ contribution per unit
= 399500/170=2350 units

Break even point in unit sales= 2350 units

b) Calculation of break even point in dollars:

Contribution Margin ratio= Contribution per unit/ Selling price100= 170/350100= 48.5714%
Contribution margin ratio= 48.5714%

Break even point in dollar sales= Fixed cost/ CM ratio
=399500/0.485714= $822500
Break even point in dollar sales=$822500

c) Calculation of number of units:
Profit= 420000*0.7= $294000

Number of units= (Fixed cost+ profit)/ contribution per unit
=(294000+399500)/170=4079.41 units

Number of units= 4079 units

d) Calculation of dollar sales:
Dollar sales= units* selling price= 4079*350= $1427650

Dollar sales= $1427650

e) Calculation of margin of safety as a percentage of sales

Margin of safety= total sales- break even sales= 910000-822500= $87500

Margin of safety as a percentage of sales= 87500/910000*100=9.62%
Margin of safety as a percentage of sales=9.62%

ekkarill92 answered 9 months ago

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