Homework Answers
(a)
Contribution margin per unit = sales price per unit - variable cost per unit
= $250 - $130 = $120
(b)
Break even point (unit sales) = fixed expenses/contribution margin per unit
= $600000/$120
= 5000 units
Contribution margin ratio = contribution margin per unit /sales price per unit
= $120/$250 = 48%
Break even point (dollar sales) = fixed expenses/contribution margin ratio
= $600000/48%
= $1250000
(c)
Break even point (unit sales) = (fixed expenses + desired profit)/contribution margin per unit
= ($600000 + $300000)/$120
= 7500 units
Break even point (dollar sales) = (fixed expenses + desired profit)/contribution margin ratio
= ($600000 + $300000)/48%
= $1875000
(d)
note: the original question does not provide actual sales figures, therefore margin of safety is computed using information from (c)
margin of safety (in units) = total sales - break even sales
= 7500 - 5000
= 2500 units
margin of safety (in dollars) = total sales - break even sales
= $1875000 - $1250000
= $625000
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