Question

Roustabout Company manufactures skateboards. Last year’s income statement is summarized below.

Skateboards(2,000 units)

  

Total   

Sales Revenue $ 100,000

Variable Costs $ 40,000

Contribution Margin $ 60,000   

Fixed Costs $ 55,500

Pre-Tax Profit $ 4,500   

Required:

a. What is the CM per unit?

b. How many skateboards must be sold to breakeven?

c. What level of revenue is needed to earn a target pre-tax income of $21,000? Use CM per unit to calculate your answer.

d. If variable costs increase to $30 per skateboard, what decrease in annual fixed costs must be achieved to keep the same breakeven point as calculated in part b?

e. Back to original assumptions: What is the CM ratio?

f. Using the CM ratio, what level of revenue is needed to breakeven?

g. Using the CM ratio, how many skateboards must be sold to earn a target pre-tax profit of $51,000?

h. How many skateboards must be sold to earn after-tax profit of $147,000 (with a tax rate of 30%)?

i. What is the margin of safety for Roustabout Company in units and in dollars?

j. If Roustabout increases its sales by 5%, what will happen to profits? Use degree of operating leverage to answer this question.

Answer 1

Ans.	Roustabout Company
	Contribution Income Statement
		Total	Per unit
	Sales (2,000 * p)	$100,000	$50
	Less: Variable cost (2,000 * v)	-$40,000	-$20
	Contribution margin	$60,000	$30
	Less: Fixed cost	-$55,500
	Net income	$4,500
	Selling price (p) per unit = Total sales / Sales units
	$100,000 / 2,000   =    $50.
	Variable cost (v) per unit = Total Variable cost / Sales units
	$40,000 / 2,000   =    $20.
Ans. A	Contribution margin (CM) per unit = Selling price per unit - Variable cost per unit
	$50 - $20    =    $30 per unit
Ans. B	Break even point (in units)   =   Fixed cost / Contribution margin per unit
	$55,500 / $30
	1,850   skateboards
Ans. C	Units sales for desired profit   =   (Fixed cost + Target profit) / Contribution margin per unit
	($55,500 + $21,000) / $30
	$76,500 / $30
	2,550   skateboards
Ans. D	New contribution margin per unit = Selling price per unit - Increased variable cost per unit
	$50 - $30   =    $20 per unit
	Break even point (in units)   =   Fixed cost / Contribution margin per unit
	1,850 = New fixed cost / $20
	New fixed cost = 1,850 * $20
	New fixed cost = $37,000
	Decrease in fixed cost    = $55,500 - $37,000   =	$18,500
Ans. E	Contribution margin ratio   =    Contribution margin / Sales * 100
	$60,000 / $100,000 * 100
	60%
Ans. F	Break even point    =   Fixed cost / Contribution margin ratio
	$55,500 / 60%
	$92,500