Answers
| 1) | |
| Break-even point in units | 4,160 |
| Break-even point in dollars | $416,000 |
| 2) | |
| Margin of safety | $104,000 |
| Margin of safety ratio | 20% |
Working notes:
1)
Break-even point in units = Fixed cost / Contribution margin per unit
Contribution margin = Operating income + Fixed cost
= $26,000 + $104,000
= $130,000
If sales is 100%
Contribution margin ratio (given) is 25%
Variable cost to sales ratio is 75% (100% - 25%)
If contribution margin is $130,000 at 25%
Sales at 100% is $520,000 (100 * $130,000 / 25)
Sales in units = $520,000/$100 per unit
= 5,200 units
Contribution margin per unit = $130,000/5,200 units
= $25 per unit
Therefore, Break-even point in units = $104,000/$25 per unit
= 4,160 units
Hence, break-even point in units is 4,160.
Break-even point in dollars = Fixed cost / contribution margin ratio
= $104,000/0.25
= $416,000
Therefore, break-eve point in dollars is $416,000.
2)
Margin of safety = Total sales revenue - Break-even point in dollars
= $520,000 - $416,000
= $104,000
Therefore, margin of safety is $104,000.
Margin of Safety ratio = Margin of safety / Total sales * 100
= $104,000 / $520,000 * 100
= 20%
Therefore, margin of safety ratio is 20%.
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