(LO 4, 5) Mabo Company makes calculators that sell for $20 each. For the coming year, management expects fixed costs to total $220,000 and variable costs to be $9 per unit.

Question

Instructions
a. Compute break-even point in units using the mathematical equation.
b. Compute break-even point in dollars using the contribution margin (CM) ratio.
c. Compute the margin of safety percentage assuming actual sales are $500,000.
d. Compute the sales required in dollars to earn net income of $165,000.

Compute break-even point, contribution margin ratio, margin of safety, and sales for target net income.

Accepted Answer

a.

[latex]\begin{aligned} ext { Sales }- ext { Variable costs }- ext { Fixed costs } &= ext { Net income } \\$ 20 \mathrm{Q}-\$ 9 \mathrm{Q}-\$ 220,000 &=\$ 0 \\$ 11 \mathrm{Q} &=\$ 220,000 \\mathrm{Q} &=20,000 ext { units }\end{aligned}[/latex]

b.

[latex]\begin{aligned} ext { Unit contribution margin } &= ext { Unit selling price }- ext { Unit variable costs } \\$ 11 &=\$ 20-\$ 9 \ ext { Contribution margin ratio } &= ext { Unit contribution margin } \div ext { Unit selling price } \55 \% &=\$ 11 \div \$ 20 \ ext { Break-even point in dollars } &= ext { Fixed costs } \div ext { Contribution margin ratio } \&=\$ 220,000 \div 55 \% \&=\$ 400,000\end{aligned}[/latex]

c.

[latex]\begin{aligned} ext { Margin of safety } &=\frac{ ext { Actual sales }- ext { Break-even sales }}{ ext { Actual sales }} \&=\frac{\$ 500,000-\$ 400,000}{\$ 500,000} \&=20 \%\end{aligned}[/latex]

d.

Sales [latex]-[/latex] Variable costs [latex]-[/latex] Fixed costs [latex]=[/latex] Net income

[latex]\begin{aligned}\$ 20 \mathrm{Q}-\$ 9 \mathrm{Q}-\$ 220,000 &=\$ 165,000 \\$ 11 \mathrm{Q} &=\$ 385,000 \\mathrm{Q} &=35,000 ext { units }\end{aligned}[/latex]

35,000 units [latex] imes \$ 20=\$ 700,000[/latex] required sales
OR
(Fixed costs + Target net income) [latex]\div[/latex] Contribution margin ratio [latex]=[/latex] Sales in dollars [latex](\$ 220,000+\$ 165,000) \div .55=\$ 700,000[/latex]

Question 5.PP: (LO 4, 5) Mabo Company makes calculators that sell for $20 e...

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