Question

2. Suppose Westover Corp.'s breakeven point is revenues of $1,100,000. Fixed costs are $660.000 Requirements 1. Compute the contribution margin percentage. 2. Compute the selling price if variable costs are $16 per unit. 3. Suppose 90,000 units are sold. Compute the margin of safety in units and dollars. 4. What does this tell you about the risk of Westover making a loss? What are the most likely reasons for this risk to increase? Requirement 1. Compute the contribution margin percentage Determine the formula for the contribution margin percentage. Contribution margin percentage (1) L (2) (Enter percentage as a whole number.) The contribution margin percentage is % Requirement 2. Compute the selling price if variable costs are $16 per unit. Determine the formula used to calculate the selling price. Selling price = (3) I L (5) ) The selling price is $ . Requirement 3. Suppose 90,000 units are sold. Compute the margin of safety in units and dollars. Determine the formula to calculate the margin of safety in dollars. (6) - (7) - Margin of safety in dollars The margin of safety is units and $ Requirement 4. What does this tell you about the risk of Westover making a loss? What are the most likely reasons for this risk to increase? The risk of making a loss is (8) The most likely reasons for this risk to increase is (9)

Answer 1

Answer

1.

Breakeven Point = Fixed Cost / Contribution Margin %

Contribution Margin % = Fixed Cost / Breakeven Point

= $660,000 / $1,100,000

Contribution Margin = 60%

2.

Contribution Margin = Sales Price – Variable Cost

If Contribution Margin Ratio = 60%, that means Contribution Margin is 60% of Sales, and Contribution Margin is the difference of Sales – Variable Cost, so that means if Contribution Margin is 60% then Variable cost is 40%.

Variable cost = $16 per unit

Selling price = $16 / 40%

Selling price = $40

3.

Margin of safety is the stock sold over the breakeven point.

Margin of Safety (In $) = Sales – Breakeven Point

= (90,000 Units * $40) – $1,100,000

= $2,500,000

Margin of Safety (In Units) = Margin of Safety (In $) / Sales price per unit

= $2,500,000 / $40

= 62,500 Units

4.

As we can see that company is selling more than its breakeven point and there is a lot of Margin of Safety, so the chances of making loss is less. The risk is less.

The most likely reasons for risk are:

1. Increase in Variable cost due to increase in cost.

2. Increase in Fixed Cost due to increase in cost.

3. Decrease in Sales price due to tough competition.

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