Question

Chapter 3 Multitasking Maniacs Co. Multitasking Maniacs Co. manufactures and sells a specialized cell phone. The company's contribution format income statement for the most recent year is given below: %of Sales 100% Total Per Unit Sales (20,000 units) 1,200,000 60 Variable Expense Contribution Margin Fixed Expense Net Income 900,000 $45 $300,000 $15 $240,000 60,000 Management is anxious to increase the company's profit and has asked for an analysis of a number of items. Required 1. Compute the company's CM ratio 2. Compute the company's break-even point in both units and sales dollars 3. Compute the company's margin of safety in both units and sales dollars for the most recent af

Answer 1

1. CM ratio = Contribution margin/Sales = $300000/$1200000 = 25%

2. Break-even point in units = Fixed expenses/Contribution per unit = $240000/$15 = 16000

Break-even point in sales dollars = 16000 units x $60 = $960000

OR

Fixed expenses/CM ratio = $240000/25% = $960000

3. Margin of safety (units) = Actual sales units - Break-even sales units = 20000 - 16000 = 4000

Margin of safety (sales dollars) = Actual sales - Break-even sales = $1200000 - $960000 = $240000

4. Increase in net operating income: $38000

Increase in contribution margin (25% x $400000)	$       1,00,000
Less: Increase in fixed costs	62000
Increase in net operating income	$           38,000

5. Sales price: $68 per unit

Profit = [(Sales price - Variable cost) x Quantity sold] - Fixed expense

Assuming the sales price to be 'X'

$266000 = [(X - $45) x 22000] - $240000

$266000 = 22000X - $990000 - $240000

$266000 + $990000 + $240000 = 22000X

$1496000 = 22000X

X = $1496000/22000 = $68