BE 158

Kettle Goods Company has a unit selling price of $500, variable cost per unit $300,
and fixed
costs of $170,000.
Instructions
Compute the break-even point in units and in sales dollars.
Solution 158 (4 min.)
Contribution margin per unit= 500-300=200

$500X − $300X − $170,000 = 0

BEP in units = 17000/200= 850 units
BEP in dollars = 850 units × $500 = $425,000

Contribution margin ratio= 200/800*100%=25%

BEP in dollars =17000/25% = $425,000

BE 159
Manhattan Cookery reported actual sales of $2,000,000, and fixed costs of $400,000.
The
contribution margin ratio is 25%.
Instructions
Compute the margin of safety in dollars and the margin of safety ratio.

Solution 159 (4 min.)

BEP in dollars: $400,000 ÷ 25% = $1,600,000
Margin of safety in dollars: $2,000,000 − $1,600,000 = $400,000
Margin of safety ratio: $400,000 ÷ $2,000,000 = 20%

BE 160
The following monthly data are available for Marketplace, Inc. which produces only
one product
which it sells for $18 each. Its unit variable costs are $8, and its total fixed expenses
are $15,000.
Actual sales for the month of May totaled 2,000 units.
Instructions
Compute the margin of safety in units and dollars for the company for May.

Solution 160 (4 min.)

Contribution margin per unit= 18-8=10

BEP in units: 15000/10=1500 units

BEP in = X = 1,500 units
BEP in dollars = 1500 units × $18=27000

Units at current sales level = 2,000*18=36000

Margin of safety=36000-27000=9000
Margin of safety = (2,000 – 1,500) × $18 = $9,000
Sales can drop by $9,000 before the company incurs a l
Ex. 177
Down Company has a unit selling price of $500, variable cost per unit of $300, and
fixed costs of
$220,000.
Instructions
Compute the break-even point in units and in sales dollars.

Solution 177 (5 min.)

$500X – $300X – $220,000 = 0
Break-even point in units = 1,100 units ($220,000 ÷ $200)
Break-even point in dollars = 1,100 units × $500 = $550,000

Ex. 178
Alley Company makes student book bags that sell for $20 each. For the coming year,
management expects fixed costs to be $240,000. Variable costs are $15 per unit.
Instructions
(a) Compute break-even sales in dollars using the mathematical equation.
(b) Compute break-even sales using the contribution margin ratio.
(c) Compute margin of safety ratio assuming actual sales are $1,200,000.
(d) Compute the sales required to earn net income of $120,000, using the
mathematical
equation.
Solution 178 (19–24 min.)
Contribution margin per unit=

20-15=5

(a) Break-even Sales = Variable Costs + Fixed Costs

X = .75X + $240,000
.25X = $240,000
X = $960,000

240000/5=48000 units

(b) Contribution Margin per Unit = Unit Selling Price – Unit Variable Cost
CM = $20 – $15 = $5
Contribution Margin per Unit
Contribution Margin Ratio = —————————————

Unit Selling Price

CM Ratio = $5 ÷ $20 = 25%

Fixed Costs
Break-even Sales = ————————————
Contribution Margin Ratio

= $240,000 ÷ 25% = $960,000

 (c) Sales $1,200,000
Less: Break-even Sales 960,000
Margin of Safety $ 240,000

Margin of Safety
Margin of Safety Ratio = ———————
Actual Sales

= $240,000 ÷ $1,200,000 = 20%

Fixed Costs + Targeted Net Income

(d) Required Sales =________________________________

Contribution Margin per Unit

$240,000 + $120,000
___________________= 72000 units
5

20X72000 = $1,440,000

240000+120000
________________=1440000

25%

Ex. 179
Wayman Company developed the following information for the product it sells:
Sales price $50 per unit
Variable cost of goods sold $23 per unit
Fixed cost of goods sold $800,000
Variable selling expense 10% of sales price
Variable administrative expense $2.00 per unit
Fixed selling expense $400,000
Fixed administrative expense $300,000
For the year ended December 31, 2008, Wayman Company produced and sold
100,000 units of
product.
Instructions
(a) Prepare a CVP income statement using the contribution margin format for
Wayman
Company for 2008.
(b) What was the company's break-even point in units in 2008? Use the contribution
margin
technique.
(c) What was the company's margin of safety in dollars in 2008?