Question

5. Henning Co. estimates that variable costs will be 70% of sales and fixed costs will total $2.160,000. The selling price of the product is $10, and 750.000 units will be sold. Using the mathematical equation, (a) Compute the break-even point in units and dollars. (6) Compute the margin of safety in dollars and as a ratio. (c) Compute net income.

Answer 1

(a)	Units		750,000
	Sales	$10	$7,500,000
	Less: Varaible Cost	$7	$5,250,000
	Contribution margin	$3	$2,250,000
	Less: Fixed Cost		$2,160,000
	Net Income		$90,000
	Break-Even Point in Units =	Total Fixed Costs / Contribution Margin per unit
	=	$2,160,000/$3
	=	720,000	units
	Break-Even Point in Sales =	Total Fixed Costs / Contribution Margin Ratio
	=	$2,160,000/0.30
	=	$7,200,000
	Contribution margin ratio =	Contribution margin/sales
	=	$3/$10
	=	30%
(b)	Margin of safety in dollars =	Actual Sales - Break Even Point
	=	$7,500,000 - $7,200,000
	=	$300,000
	Margin of safety =	(Actual Sales - Break Even Point)/Actual Sales
	=	($7,500,000 - $7,200,000)/$7,500,000
	=	4.00%
(c)	Net Income	$90,000