Question

Quality Mfg. Co. has the following cost information: Fixed Costs $18,000 Sales Price Per Unit $80 Variable Costs Per Unit $50 (a) Using the Equation Approach, determine the Break Even Point in $ Sales Volume. (b) Using the Equation Approach, determine the Total Sales Volume ($) that must be sold to earn a profit of $6,000 before taxes. (c) What is the Contribution Margin Ratio? For each of the above questions, show the applicable equation & your work.

Answer 1

A) Calculation of Break even point Given: fixcal costs = $18000 Selling price - $80, Variable cost = 50 .: Contribution = Selling price - Variable cost - 80 - 50 l Contribution = $30 Break even point = fixed cost Contribution por unit 18 ooooh 30 do )) ) 600 units c Break even point = tot Break even point in $ sales = 600 x 80 = $48000 OR Profit volume ratio 1 Contribution margin rotic - Contribution x 100 = 30 x100 - 37.57 von Break even point in & sales = fixed cost = 18000 Hence. B.E.P. in $ is $48000 - PUR 48000 37.5%

SHREE Data: 1 1 Page Na oles value value to B) to carn Total sales $60oo before taxes Break Evgh point in $ = fixed al sales in $ = fixed cost t Reavinal profit Contribution margin rotic = 18000 16000 37.5 % = $6h00c Hence in coder to earn a profit of $6000 before taxes we must sell goods worth $ 64000.

C ) what is contribution margin ratio?

Answer:

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage. The total margin generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the proportion of profit generated on that specific sale.

The contribution margin should be relatively high, since it must be sufficient to also cover fixed expenses and administrative overhead. Also, the measure is useful for determining whether to allow a lower price in special pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to continue selling a product at that price point, since the company would have considerable difficulty earning a profit over the long term. However, there are cases where it may be acceptable to sell a package of goods and/or services where individual items within the package have a negative contribution margin, as long as the contribution margin for the entire package is positive. The ratio is also useful for determining the profits that will arise from various sales levels