Question

Sales (8,000 units) $440,000 $55 Variable costs 242,000 30.25 Contribution margin 198,000 $24.75 Fixed expenses 195,426 Net income $2,574 Management is considering the following course of action to increase net income: Reduce the selling price by 3%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 10%. Using the contribution margin technique, compute the break-even point in units and dollars and margin of safety in dollars: (Round intermediate calculations to 4 decimal places e.g. 0.2522 and final answer to 0 decimal places, e.g. 2,510.) (a) Assuming no changes to selling price or costs.

Answer 1

Instructions are below.

Step-by-step explanation:

Giving the following information:

Salling price= $55 per unit

Variable costs= $30.25 per unit

Fixed expenses= $195,426

We need to calculate the break-even point both in units and in dollars, without any change. We need to use the following formulas:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 195,426/ (55 - 30.25)

Break-even point in units= 7,896 units

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 195,426/ [(55 - 30.25) / 55]

Break-even point (dollars)= $434,280

Now, we can calculate the margin of safety in dollars:

Margin of safety= (current sales level - break-even point)

Margin of safety= 440,000 - 434,280= $5,720