Question

EWL Corporation sells its product for $130 per unit. Its total cost function is TC = $15,000+ $800. EWL's production capacity is 500 units per month. It normally operates at 80% of capacity. Match the lettered items on the right with the appropriate item on the left. Each numbered item has only one correct answer. Each lettered item may be used once, more than once, or not at all. 1. Actual unit activity minus A. Margin of safety Breakeven point in units B. Degree of operating 2. Breakeven point in sales leverage dollars C. 100 3. Breakeven point in units D. 300 4. Contribution margin / Profit E. 400 5. Margin of safety in revenue G. $15,000 dollars under normal H. $39,000 operations 6. Margin of safety in units when operating at full capacity J. None of the above

Answer 1

Sales - Breakeven sales = Margin of safety

Breakeven point = $15,000 / ($130 - $80) = 300 units

Break even point in dollars = 300 X $130 = $39,000

Degree of operating leverage = Contribution margin / Profit

Margin of safety under normal operation = (500 X 80% X $130) - $39,000 = $13,000

Margin of safety in units under full capacity = 500 - 300 = 200

1.	A
2.	H
3.	D
4.	B
5.	J
6.	I