Question

Roan Anderson is evaluating a business opportunity to sell grooming kits at dog shows. Roan can buy the grooming kits at a wholesale cost of $29 per set. He plans to sell the grooming kits for $84 per set. He estimates fixed costs, such as travel costs, booth rental cost, and lodging, to be $880 per dog show. Requirements 1. Determine the number of grooming kits Roan must sell per show to break even. Assume Roan wants to earn a profit of $1,320 per show. a. Determine the sales volume in units necessary to earn the desired profit. b. Determine the sales volume in dollars necessary to earn the desired profit. c. Using the contribution margin format, prepare an income statement (condensed version) to confirm your answers to Requirements (a) and (b). 3. Determine the margin of safety between the sales volume at the break-even point and the sales volume required to earn the desired profit. Determine the margin of safety in sales dollars, in units, and as a percentage. 2. Requirement 1. Determine the number of grooming kits Roan must sell per show to break even. Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. + = Break-even sales in units

Answer 1

Answer to Requirement 1:

Selling price per unit = $84
Variable cost per unit = $29
Fixed costs = $880

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $84 - $29
Contribution margin per unit = $55

Breakeven sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Breakeven sales in units = ($880 + $0) / $55
Breakeven sales in units = 16

Answer to Requirement 2:

Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Required sales in units = ($880 + $1,320) / $55
Required sales in units = 40

Required sales in dollars = Required sales in units * Selling price per unit
Required sales in dollars = 40 * $84
Required sales in dollars = $3,360

Income Statement Amount Sales 3,360 $ Variable expenses 1,160 $ Contribution margin 2,200 $ Fixed expenses 880 Net operating income 1,320 Per Unit 84.00 29.00 55.00

Answer to Requirement 3:

Breakeven sales in dollars = Breakeven sales in units * Selling price per unit
Breakeven sales in dollars = 16 * $84
Breakeven sales in dollars = $1,344

Margin of safety in sales dollars = Required sales in dollars - Breakeven sales in dollars
Margin of safety in sales dollars = $3,360 - $1,344
Margin of safety in sales dollars = $2,016

Margin of safety in unit sales = Required sales in unit - Breakeven sales in unit
Margin of safety in unit sales = 40 - 16
Margin of safety in unit sales = 24

Margin of safety in percentage = Margin of safety in sales dollars / Required sales in dollars
Margin of safety in percentage = $2,016 / $3,360
Margin of safety in percentage = 60%