Question

Bob's Business sells radios for $200. The variable costs per unit are $150 and fixed costs are $500,000. 1. The unit contribution margin is 2. The contribution ratio is 3. The variable expense ratio is 4. The break-even point in dollars is 5. How many radios must Bob's Business sell in order to earn a $100,000 profit? 6. What is Bob's Business's margin of safety in dollars at the $100,000 profit level? 7. What is Bob's operating leverage at the $100,000 profit level? 8. If sales increase by 7%, what is the estimated increase in net income? (State as a percentage)

Answer 1

1)

Contribution margin per unit = Selling Price per unit - Variable cost per unit

= $200 per unit - $150 per unit

= $50 per unit

Therefore, contribution margin per unit is $50.

2)

Contribution margin ratio = Contribution margin per unit / Selling price per unit * 100

= $50 per unit / $200 per unit * 100

= 25%

Therefore, contribution margin ratio is 25%.

3)

Variable expense ratio = Variable cost per unit / Selling price per unit * 100

= $150 per unit / $200 per unit * 100

= 75%

Therefore, variable expense ratio is 75%.

4)

Break-even point in dollars = Fixed cost / Contribution margin ratio

= $500,000 / 0.25

= $2,000,000

Therefore, break-even point in dollars is $2,000,000.

5)

How many ratio sell to earn $100,000 profit = (Fixed Cost + Desired Profit) / Contribution Margin per unit

= ($500,000 + $100,000) / $50 per unit

= $600,000 / $50 per unit

= 12,000 radios

Therefore, 12,000 radios should be sold to earn a profit of $100,000.

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