Question

Sandy Bank, Inc., makes one model of wooden canoe. and, the information for it follows:

Number of canoes produced and sold		550		750		900
Total costs
Variable costs	$	112,750	$	153,750	$	184,500
Fixed costs	$	148,500	$	148,500	$	148,500
Total costs	$	261,250	$	302,250	$	333,000
Cost per unit
Variable cost per unit	$	205.00	$	205.00	$	205.00
Fixed cost per unit		270.00		198.00		165.00
Total cost per unit	$	475.00	$	403.00	$	370.00

Sandy Bank sells its canoes for $375 each.

Required:

1. Suppose that Sandy Bank raises its selling price to $500 per canoe. Calculate its new break-even point in units and in sales dollars.

2. If Sandy Bank sells 1,600 canoes, compute its margin of safety in units and as a percentage of sales. (Use the new sales price of $500.)

3. Calculate the number of canoes that Sandy Bank must sell at $500 each to generate $130,000 profit.

Answer 1

1. Computation of new break-even point in units and in sales dollars.
Break even point in quantity = Fixed Cost___
Contribution per unit

So first we need to calculate contribution per unit
Formula to calculate contribution per unit is = Selling price per unit – Variable cost per unit

As per the data available we put the figure in above formula

Contribution per unit = 500 – 205
Contribution per unit is 295

So, break even point (In quantity) = 148500
295
= 503 units (rounded)

Break-Even Sales = Fixed Costs * Sales / (Sales – Variable Costs)  
Sales = 503 X 500 = $251500
Variable cost = 205 X 503 = $103115
= 148500 * 251500 / (251500 – 103115)
Break even sales = $251695 (rounded)

2. Margin of safety (in units) = Actual Sales – Breakeven point / Selling price per unit

Actual sales = 1600 X 500 = $800000

Break even point = $251695

Margin of safety in units = 800000 – 251695 / 500

Margin of safety in units = 1097 units (rounded)

Margin of safety in % = Actual Sales – Breakeven point / Actual Sales

= 800000 – 251695 / 800000

= 68.53%

3. Number of canoes that Sandy bank must sell at $500 to generate $130000 profit are,

Just like fixed cost is considered as fixed expense, like that desire of generation of profict can also be considered as fixed expense. So,

Breakeven point = Fixed expense / Contribution margin per unit

= 148500 + 130000 / 295

= 944 (rounded)

So, 944 units must be sold in order to generate $130000 profit.