Question

Elliott Fax Shop provides faxing services. Next year, Elliott plans on selling 280,000 fax pages at a

price of $.80 each in the coming year. Product costs include:

Direct materials

$0.15

Direct labor

$0.04

Variable overhead

$0.01

Total fixed overhead $80,000

There are no variable selling expenses; fixed selling and administrative expenses total

$46,000.

Instructions:

1. Calculate the break-even point in units.

2. Calculate the break-even point in sales revenue.

3. Calculate the margin of safety in units for the coming year.

4. Calculate the margin of safety in sales revenue for the coming year.

5. What if the total selling and administrative expenses are reduced to $38,800? Recalculate:

a. Break-even point in units

b. Break-even point in sales revenue

c. Margin of safety in units for the coming year

d. Margin of safety in sales revenue for the coming year

Answer 1

Ans.	Particulars	Per unit
	Selling price per unit	$0.80
	Less: Variable cost per unit
	Direct materials	$0.15
	Direct labor	$0.04
	Variable overhead	$0.01
	Total variable cost per unit	$0.20
	Contribution margin per unit	$0.60
	Total fixed cost   ($80,000 + $46,000)   =   $126,000
Ans. 1	Break even point in unit sales =   Fixed cost / Contribution margin per unit
	$126,000 / $0.60
	210,000 units
Ans. 2	Break even point in sales revenue = Break even point in units * Selling price per unit
	210,000 * $0.80
	$168,000
Ans. 3	Margin of safety in units   = Actual sales in units - Break even in units
	280,000 - 210,000
	70,000 units
Ans. 4	Margin of safety in sales revenue   = Margin of safety in units * Selling price per unit
	70,000 * $0.80
	$56,000
Ans. 5	Total fixed cost   ($80,000 + $38,800)   =   $118,800
a	Break even point in unit sales =   Fixed cost / Contribution margin per unit
	$118,800 / $0.60
	198,000 units
b	Break even point in sales revenue = Break even point in units * Selling price per unit
	198,000 * $0.80
	$158,400
c	Margin of safety in units   = Actual sales in units - Break even in units
	280,000 - 198,000
	82,000 units
d	Margin of safety in sales revenue   = Margin of safety in units * Selling price per unit
	82,000 * $0.80
	$65,600