Question

Information concerning a product produced by Franklin Company appears as follows: Sales price per unit $ 171 Variable cost per unit $ 91 Total annual fixed manufacturing and operating costs $ 528,000

Required:

a. Contribution margin per unit.
b. Number of units that Franklin must sell to break even.
c. Sales level in units that Franklin must reach to earn a profit of $272,000.
d. Determine the margin of safety in units, sales dollars, and as a percentage.

Answer 1

a. The Contribution margin per unit is $80

b. The Number of units that Franklin must sell to break even is 6,600 units

c. The Sales level in units that Franklin must reach to earn a profit of $272,000 is 10,000 units

d. The margin of safety in units is 3,400 units

The margin of safety in sales dollars is $581,400

The margin of safety as a percentage is 34%

Step-by-step explanation:

a. In order to calculate the Contribution margin per unit we would have to use the following formula:

Contribution margin per unit = Sale Price - Variable Cost

= $171 - $91

= $80

b. To calculate the Number of units that Franklin must sell to break even we would have to use the following formula:

Break even sales (in units) = Fixed Cost / Contribution margin per unit

= $ 528,000 / $80

= 6,600 units

c. To calculate the Sales level in units we would have to use the following formula:

Sales level in units= (Fixed Cost + Desired Profit) / Contribution Margin Per unit

=($ 528,000+$272,000)/$80

= 10,000 units

d. To calculate the margin of safety in units, sales dollars, and as a percentage we would have to use the following formula:

Margin of Safety (in Units) = Sales - Break even Sales

= (10,000 - 6,600) units

= 3,400 units

Margin of Safety (in $) = Margin of Safety (in units) x Sale Price

= 3,400 units * $171

= $581,400

Margin Of Safety (in percentage) = (Actual Sales - Break even sales) / Actual Sales

= (10,000 units -6,600 units) / 10,000 units

= 34%