Question

Break-Even in Units and Sales Dollars, Margin of Safety

Drake Company produces a single product. Last year's income statement is as follows:

Sales (18,000 units)	$1,083,600
Less: Variable costs	723,600
Contribution margin	$360,000
Less: Fixed costs	273,000
Operating income	$87,000

Required:

1. Compute the break-even point in units and sales revenue. In your computations, round the contribution margin per unit to the nearest cent and round the contribution margin ratio to four decimal places. Round your final answers to the nearest whole unit or dollar.

Break-even units	13650	units
Break-even dollars	$821730

2. What was the margin of safety in dollars for Drake Company last year? Round your final answer to the nearest whole dollar.
$261,870

3. Suppose that Drake Company is considering an investment in new technology that will increase fixed costs by $232,600 per year, but will lower variable costs to 46 percent of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming Drake makes this investment. Round all amounts to the nearest dollar.

Drake Company
Budgeted Income Statement
Sales	$1,083,600
Less: Variable costs	?
Contribution margin	$ ?
Less: Fixed costs	?
Net income	$ ?

What is the new break-even point in units, assuming the investment is made? In your computations, round the unit contribution margin to the nearest cent. Round your final answer to the nearest whole unit.
? units

Answer 1

1. Gemputanon Breakenen points an iniz) a = Breakuen point Luin units 2__ Fixed cost Contribution per unit Contribution per unit a total contribution - No. of units e 360.DDO 18000 $20 per writ Breakinen point = Lun units) 273000 20 4 B E 13650 units Borzakeven point 192 lun Sales Reunus) Fixed lost * Sales Contribution = 273000 x1033600 360,000 - $821730

2 Margin of safety : Margin of sales safety = Total Sales - Breakeren 3 1083600 - 821730___ = $261910 ③ Fixed Cost has increased Variable lost has reduced by 232600 & to 46% of Sales : Budgeted Income Statement o Sales 118000 unite) variable Lost (46% of 1083600)_ - contoibution 1083600 1498.456) 585144 (505600) Its Fixed cost (243000 + 232600) - Operating unieme- Breakenes point_ Fixed lost (ur units) 79544 Contribution per unit 505600 32.508 = 5553 units

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