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Crane Bucket Co, a manufacturer of rain barrels, had the following data for 2019.

Sales 2,430 units
Sales price $50 per unit
Variable costs $35 per unit
Fixed costs $18,225

(a) What is the contribution margin ratio?
Contribution margin ratio _________%

(b) What is the break-even point in dollars?
Break-even point $ ___________

(c) What is the margin of safety in dollars and as a ratio?
Margin of safety $ ___________
Margin of safety ratio _________%

(d) If the company wishes to increase its total dollar contribution margin by 30% in 2020, by how much will it need to increase its sales if selling price per unit, variable price per unit and total fixed costs remain constant?

User Skos
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1 Answer

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Final answer:

The contribution margin ratio is 30%. The break-even point in dollars is $60,750. There is no margin of safety in dollars or as a ratio. To increase the total dollar contribution margin by 30% in 2020, the company will need to increase sales by the same percentage.

Step-by-step explanation:

The questions can be answered as -

The contribution margin ratio is the selling price per unit minus the variable costs per unit, divided by the selling price per unit. In this case, the contribution margin ratio is ($50 - $35) / $50, which is 0.3 or 30%.

The break-even point in dollars can be calculated by dividing the total fixed costs by the contribution margin ratio. In this case, the break-even point in dollars is $18,225 / 0.3, which is $60,750.

The margin of safety in dollars represents the amount of sales above the break-even point. It can be calculated by subtracting the break-even point in dollars from the actual sales. In this case, the margin of safety in dollars is $60,750 - ($50 x 2,430 units), which is $0.

The margin of safety ratio represents the margin of safety as a percentage of sales. It can be calculated by dividing the margin of safety in dollars by the actual sales, and multiplying by 100. In this case, the margin of safety ratio is $0 / ($50 x 2,430 units) x 100, which is 0%.

If the company wishes to increase its total dollar contribution margin by 30% in 2020, it will need to increase its sales by that same percentage. Assuming the selling price per unit, variable costs per unit, and total fixed costs remain constant, the sales will need to increase by 30%. For example, if the company sold 2,430 units in 2019, it will need to sell 30% more units in 2020, which is 2,430 x 1.3, or 3,159 units.

User Randy James
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