Question

1. Gilitch Company has variable costs of $600,000. They are planning to sell 200,000 pairs of mittens for $4 a pair. If Ilitch breaks even at this level of sales what are the fixed costs?

1. Zark and Sons Ltd. makes travel bags that dissolve in water and has variable costs of $42 per unit and expects fixed costs to total $320,000. The travel bags sell for $56 each. Calculate:

The Break Even Point in Dollars The Margin of Safety and Margin of Safety ratio assuming actual sales total $1,382,400 The sales dollars required to earn net income of $410,000

Answer 1

Requirement 1

At Break-even point the fixed cost is equal to Contribution margin.

Fixed cost = $200000

Working

Sales revenue	$ 800,000
Variable costs	$ 600,000
Contribution margin	$ 200,000
Fixed cost	$ 200,000
Net operating income	$ 0

Requirement 2

a---$1,280,000

b---$102,400 and 7%

c---$2,920,000

Working

A	Unit Sale price	$                    56.00
B	Unit Variable cost	$                    42.00
C=A - B	Contribution margin per unit	$                    14.00
D	Fixed expenses	$ 320,000
E = D/C	Units to be sold to breakeven	$ 22,857
F = E x A	Break Even in dollar sales [Answer 'a']	$ 1,280,000
G	Total Sales	$ 1,382,400
H = G - F	Margin of safety Sales	$ 102,400
I = H/G	Margin of safety % [Answer 'b']	7%
	Fixed cost+ Profit	$ 730,000
	Units to be sold to breakeven	$ 52,143
	Break Even in dollar sales [Answer 'c']	$ 2,920,000