Question

Perez 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 $860,000 of cash from the owners.
2. Purchased $325,000 of manufacturing equipment. The equipment has a $41,000 salvage value and a four-year useful life.
3. The company started and completed 6,100 modems. Direct materials purchased and used amounted to $51 per unit.
4. Direct labor costs amounted to $36 per unit.
5. The cost of manufacturing supplies used amounted to $15 per unit.
6. The company paid $61,000 to rent the manufacturing facility.
7. Perez sold all 6,100 units at a cash price of $175 per unit.
8. The sales staff was paid a $11.50 per unit sales commission.
9. Paid $50,000 to purchase equipment for administrative offices. The equipment was expected to have a $4,100 salvage value and a three-year useful life.
10. Administrative expenses consisting of office rental and salaries amounted to $95,625.

Required

1. Use the following partially completed form to prepare an income statement using the contribution margin format.

2. Determine the break-even point in units and in dollars.

3. 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

a $1,067,500 6,100*$175 Perez Modems, Inc. Contribution Format Income Statement Sales Variable cost Direct material $311,100 Direct labor $219,600 Manufacturing supplies $91,500 Sales commission $70,150 Total variable cost Contribution margin Fixed cost Manufacturing rent $61,000 Depreciation-manufacturing equipment $71,000 Administrative expenses-rent and salaries $95,625 Administrative expenses- Depreciation $15,300 Total Fixed expense Net profit (Loss) 6,100*$51 6,100*$36 6,100*$15 6,100*$11.5 $692,350 $375,150 ($325,000-$41,000)/4 years ($50,000-$4,100)/3 years $242,925 $132,225 Units b Break even point in sales units Fixed cost Contribution margin per unit $242,925 $61.50 3,950 Break even point in sales $ (Break even units * selling price) $691,250 3,950* $175 Working notes: Contribution margin Units sold Contribution margin per unit $375,150 a 6,100b $61.50 a/b c Margin of safety ratio 35.2% Actual sales Break even sales Margin of safety (Actual sales - break even sales) Margin of safety ratio $1,067,500 a $691,250 $376,250 b 35.2% b/a