Question

Zintendo, Inc., produces and sells a single product, the Zintendo Stitch gaming console, whose selling price is $400.00 per gaming console and whose variable costs are $224.00 per gaming console. The company's fixed costs are $5,935,750 per year. The current sales volume for the year ended 12/31/2020 is 36,300 gaming consoles.

Required:
a. Prepare a contribution margin income statement for the year ended 12/31/2020 at the current sales volume.
b. Determine the break-even point for the year.
c. What is the company's margin of safety for the year?

Answer 1

Answer and Explanation:

a. The preparation of the contribution margin income statement is presented below

Sales (36,300 × $400) $14,520,000

Less: variable cost (36,300 × $224) $8,131,200

Contribution margin $6,388,800

Less: fixed cost - $5,935,750

net income $453,050

b. The break even point is

In units

= Fixed cost ÷ contribution margin per unit

= $5,935,750 ÷ ($400 - $224)

= 33,726 units

In dollars

= Fixed cost ÷ contribution margin ratio

= $5,935,750 ÷ ($176 ÷ $400)

= $13,490,341

c. The margin of safety

In units

= Total sales units - break even units

= 36,300 - 33,726

= 2,574 units

In dollars

= Total sales - break even sales

= $14,520,000 - $13,490,341

= $1,029,659