Question

Magnificent Modems, Inc. makes modem cards that are used in notebook computers. The company completed the following transactions during year 1. All purchases and sales were made with cash. 1. Acquired $750,000 of cash from the owners. 2. Purchased $270,000 of manufacturing equipment. The equipment has a $30,000 salvage value and a four-year useful life. 3. The company started and completed 5,000 modems. Direct materials purchased and used amounted to $40 per unit. 4. Direct labor costs amounted to $25 per unit. 5. The cost of manufacturing supplies used amounted to $4 per unit. 5. The company paid $50,000 to rent the manufacturing facility. 7. Magnificent sold all 5,000 units at a cash price of $120 per unit. 3. The sales staff was paid a $6 per unit sales commission. 9. Paid $39,000 to purchase equipment for administrative offices. The equipment was expected to have a $3,000 salvage value and a three-year useful life. 0. Administrative expenses consisting of office rental and salaries amounted to $71,950. Required a. Use the following partially completed form to prepare an income statement using the contribution margin format. b. Determine the break-even point in units and in dollars. c. Assume that next year's sales are budgeted to be the same as the current year's sales. Determine the margin of safety expressed as a percentage.

Answer 1

ANSWER A

INCOME STATEMENT

DETAILS	AMOUNT	AMOUNT
SALES REVENUE(A)		600000
VARIABLE COST
DIRECT MATERIAL(5000*40)	200000
DIRECT LABOUR(5000*25)	125000
MANUFACTURING OVERHED(5000*4)	20000
SALES COMMISION(5000*6)	30000
TOTAL VARIABLE COST(B)		375000
CONTRIBUTION(A-B)		225000
FIXED COST
DEPRECIATION ON MANUFACTURING EQUIPMENT(270000-30000/4)	60000
MANUFACTURING FACILITY RENT	50000
DEPRECIATION ON ADMIN OFFICE EQUIPMENT(39000-3000/3)	12000
ADMINISTRATIVE EXPENSE	71950
TOTAL FIXED COST(C)		193950
NET INCOME(A-B)-(C)		31050

ANSWER B

BREAK EVEN POINT(UNITS)=4310 UNITS

BREAK EVEN POINT(DOLLORS)=$517200

WORKINGS

BEP(UNITS)=FIXED COST/CONTRIBUTION PER UNIT

=193950/(225000/5000)=4310 UNITS

BEP($)=BEP(UNITS)*SALES PER UNIT

=4310*120=$517200

ANSWER C

MARGIN OF SAFETY=13.8%

WORKINGS

MARGIN OF SAFETY=CURRENT SALES-BREAK EVEN SALE($)/CURRENT SALES)*100%

=(600000-517200/600000)*100%=13.8%