Question

3-28 Breakeven analysis; margin of safety (LO 1) The Stafford Company sells sports decals that can be personalized with a player's name, a team name, and a jersey number for $6 each. Stafford buys the decals from a supplier for $2.50 each and spends an additional $0.50 in variable operating costs per decal. The results of last month's operations are as follows: Sales revenue Cost of goods sold Gross profit Operating expenses Operating income $18,000 7,500 10,500 3,990 $ 6,510 Required a. What is Stafford's monthly breakeven point in units? In dollars? b. What is Stafford's margin of safety?

Answer 1

Selling price per unit = $6

Cost of buying = $2.50 per unit

Variable operating cost = $0.50 per unit

Total variable cost per unit = Cost of buying + Variable operating cost

= 2.50 + 0.50

= $3

Sales revenue = $18,000

Number of units sold = Sales revenue/Selling price per unit

= 18,000/6

= 3,000

Total variable operating expense = Number of units sold x Operating cost per unit

= 3,000 x 0.50

= $1,500

Total operating expense = $3,990

Fixed operating expense = Total operating expense - Total variable operating expense

= 3,990 - 1,500

= $2,490

Contribution margin per unit = Selling price per unit - variable cost per unit

= 6 - 3

= $3

Contribution margin ratio = Contribution margin per unit/Selling price per unit

= 3/6

= 50%

a.

Break even point in units = Fixed cost/Contribution margin per unit

= 2,490/3

= 830 units

Break even point in dollar = Fixed cost/Contribution margin ratio

= 2,490/50%

= $4,980

b.

Margin of safety = Actual sales - Break even sales

= 18,000 - 4,980

= $13,020

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