Question

Paragraph Question 4: (total 6 marks) AD Company estimates that variable costs will be 70% of sales and fixed costs will total $1,800,000. The selling price of the product is $10, and 700,000 units will be sold. Instructions: Using the mathematical equation (a) Compute the break-even point in units and dollars. (b) Compute the margin of safety in dollars and as a ratio. (c) Compute net income. (2 marks) (2 marks) (2 marks)

Answer 1

Sol Information Given Selling Price per unit (A) Variable Cost (B) Variable Cost Per Unit (A) x (B) Fixed Cost Units Sold $ 10.00 70% of Sale $ 7.00 $ 1,800,000 700000 units 1. Calculation of Break even Point (BEP) in units and sales revenue BEP in Units Formulate to calculate BEP in Units is as below BEP in Units Fixed Cost Contribution per unit We know fixed cost, let us calculate Contribution per unit Selling Price per Unit 10.00 Less: Variable Cost per Unit 7.00 Contribution Per Unit 3.00 1800000 BEP in Units BEP in Units 600000 Units

BEP in Sales Value Formulate to calculate BEP in Value is as below BEP in Value = BEP in Units x Selling price per unit = 600000 x 10 BEP in Sales Value = $6,000,000 3.Margin of Safety ratio and Margin of Safety in unit when units sold 700000 units Margin of Safety ratio Current Sale value - BEP sale Value Margin of Safety Ratio Current Sale Value Note: Sales Volume units Sale Value BEP in Sales Value $ 700,000 $ 7,000,000 $ 6,000,000 Margin of Safety Ratio 7000000-6000000 7000000 Margin of Safety Ratio fety Ratio - 1000000 7000000 1000000

Margin of Safety Ratio = 0.1429 Or 1 4.29% Margin safety in Dollars Margin Of Safety in Dollars = Current Sales value - BEP sales Value Margin Of Safety in Dollars = 7000000 - 6000000 Margin Of Safety in Dollars = $1,000,000 3.Net Income Units Sold Selling Price Per Unit Sales (700000x10) Less: Variable Cost (700000x7) 700000 $ 10.00 $7,000,000 $ 4,900,000 Contribution Margin-(A) Less: Fixed Cost (B) Net Income (A)-(B) $2,100,000 $ 1,800,000 $ 300,000