Question

Gilley, Inc., sells a single product. The company's most recent income statement is given below.

         Sales (4,000 units)                                       $120,000

         Less variable costs                                         (68,000)

         Contribution margin                                        52,000

         Less fixed expenses                                        (40,000)

         Net income                                                  $ 12,000

         Required: Determine the following:

         a.      Contribution margin per unit is                        $ _______________ per unit

         b.      If sales are doubled to $240,000,

                  total variable costs will equal                                         $ _______________

         c.      If sales are doubled to $240,000,

                  total fixed costs will equal                                             $ _______________

         d.      If 10 more units are sold, profits will increase by          $ _______________

         e.      Compute how many units must be sold to break even. # _______________

         f.       Compute how many units must be sold

                  to achieve profits of $20,000.                                        # _______________

         g.      Compute marring of safety in units                                      #______________   

                                         

Answer 1

	Total cost	Per unit cost (Total cost/ Number of units)
Sales (4,000 units)	120,000	30
Less: Variable costs	(68,000)	-17
Contribution margin	52,000	13
Less: Fixed expenses	(40,000)
Net Income	$12,000

a.

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 30-17

= $13

b.

If sales are doubled to $240,000, variable cost also double.

Total variable costs will equal to = Variable cost x 2

= 68,000 x 2

= $136,000

c.

If sales are doubled to $240,000, total fixed costs remains unchanged. Due to increase/decrease in volume of sales units Fixed costs will remains the same.

Total fixed costs will equal = $40,000

d.

	Total	Per unit
Sales (4,010 x 30)	120,300	30
Less: Variable costs (4,010 x 17)	(68,170)	17
Contribution margin	52,130	13
Less: Fixed expenses	(40,000)
Net Income	$12,130

If 10 more units are sold, profits will increase by $130 (12,130-12,000)

e.

Break even sales in unit = Fixed expense / Contribution margin per unit

= 40,000/13

= 3,077 units ( Round off to whole number)

3,077 units must be sold to break even.

f.

Units to be sold to earn target profit = ( Fixed expense + Target profit)/ Contribution margin per unit

= (40,000+20,000)/13

= 60,000/13

= 4,615 units ( Round off to whole number)

4,615 units must be sold to achieve profits of $20,000.

g.

Margin of safety in units= Actual sales - Break even sales

= 4,000-3,077

= 923 units

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