Question

Exercise 1. Fantasy Corporation manufactures a single product. The selling price is $125 per unit, and variable costs amount to $81 per unit. The fixed costs are $28,500 per month. (a) What is the contribution margin per unit $_ per unit (b) What is the contribution margin ratio? _% (Rounded to 1 decimal place) (c) What is the monthly sales volume (in dollars) at the break-even point? $_ (d) How many units must be sold each month to earn a monthly operating income of $50,000? units (e) What is the monthly margin of safety (in dollars) if 1.500 units are sold each month? (1) What will be the monthly operating income if 1.500 units are sold each month?

Answer 1

Selling price = $125 per unit

Variable cost = $81 per unit

Fixed costs = $28,500 per month

a) Contribution margin per unit = Sales per unit - variable cost per unit = $125 - $81

Contribution margin per unit = $44 per unit

b) Contribution margin ratio = Contribution per unit / Selling price per unit = $44 / $125 * 100

Contribution margin ratio = 35.2 %

c) Break even point in dollars = Fixed cost / Contribution margin ratio * 100

= $28,500 / 35.2 * 100 = $ 80,965.9 or $ 80,966

d) Desired operating income or Desired profit $ 50,000

Units to be sold each month = $\frac{Fixed cost + Desired profit}{Contribution margin per unit}$

= ($28,500 + $50,000) / $44

= $78500 / $44 = 1784 units

e) If 1500 units are sold each month, margin of safety in dollars

Contribution margin ratio remains constant and fixed cost remains constant

Monthly Margin of safety (in dollars) = Profit / Contribution margin ratio

= $37500 / 35.2 * 100 = $ 106,534

f) If 1500 units are sold each month, the monthly operating income will be $ 37,500

Working note :

Income Statement for question (e), (f)  for 1500 units

Particulars	Amount ($)
Sales @125	187,500
Less: Variable cost	(121,500)
Contribution margin	66,000
Less: Fixed cost	(28,500)
Operating profit	37,500