Question

Sandy Bank, Inc., makes one model of wooden canoe. And, the information for it follows: 600 800 950 Number of canoes produced and sold Total costs Variable costs Fixed costs Total costs Cost per unit Variable cost per unit Fixed cost per unit Total cost per unit $129.000 $228.000 $357.000 $172.000 $228.000 $400,000 $204,250 $228.000 $432.250 $ 215.00 380.00 $ 595.00 $ 215.00 285.00 $ 500.00 $ 215.00 240.00 $ 455.00 Required: 1. Suppose that Sandy Bank raises its selling price to S500 per canoe. Calculate its new break-even point in units and in sales dollars. (Do not round intermediate calculations. Round your final answers to nearest whole number.) New Break-Even Units Canoes Break-Even Sales Revenue 2. If Sandy Bank sells 1,620 canoes, compute its margin of safety in dollars and as a percentage of sales. (Use the new sales price of $500.) (Round your answers to the nearest whole number.) Margin of Safety Percentage of Sales 3. Calculate the number of canoes that Sandy Bank must sell at $500 each to generate $140,000 profit. (Round your answer to the nearest whole number.) Target Sales Units Canoes

Answer 1

SOLUTION

1. Contribution margin per unit = Selling price per unit - Variable cost per unit

= $500 - $215 = $285

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

= $285 / $500 = 57%

Break even point in units = Fixed expenses / Contribution margin per unit

= $228,000 / 285 = 800 canoes

Break even point in sales dollar = Fixed expenses / Contribution margin ratio

= $228,000 / 57% = $400,000

2. Actual sales = 1,620 * $500 = 810,000

Margin of safety = Actual sales - Break even sales

= 810,000 - 400,000 = $410,000

Margin of safety (as %) = Margin of safety / Actual sales

= 410,000 / 810,000 = 51%

3. Target sales units = (Fixed expenses + Desired profit) / Contribution margin per unit

= (228,000 + 140,000) / 285

= 368,000/ 285 = 1,291 canoes