Question

Break-Even Units, Contribution Margin Ratio, Margin of Safety Khumbu Company's projected profit for the coming year is as follows: Total Per Unit Sales $3,105,375 $45.50 Total variable cost 1,304,258 19.11 Contribution margin $ 1,801,117 $ 26.39 Total fixed cost 1,447,726 Operating income $ 353,391 Required: 1. Compute the break-even point in units. If required, round your answer to nearest whole value. units 2. How many units must be sold to earn a profit of $240,000? If required, round your answer to nearest whole value. units 3. Compute the contribution margin ratio. If required, round your answer to nearest whole number. % Using the rounded ratio from above, compute the additional profit that Khumbu would earn if sales were $160,000 more than expected. $ 4. For the projected level of sales, compute the margin of safety in units. units Check My Work

Answer 1

Answer:

(1) $Break-even\ point\ in\ units= \frac{Total\ fixed\ cost}{Contribution\ margin\ per\ unit}$

$Break-even\ point\ in\ units= \frac{1,447,726}{26.39}$

                                                   = 54,858.88

                                                   = 54,860 units

(2) Required profit = $240,000

Target contribution margin = Required profit + Fixed costs

                                             = $240,000 + $1,447,726

                                             = $1,687,726

$Units\ to\ be\ sold=\frac{Target\ contribution\ margin}{Contribution\ margin\ per\ unit}$

$Units\ to\ be\ sold=\frac{1,687,726}{26.39}$

                                    = 63,953.23

                                    = 63,953 units

(3) $contribution\ margin\ ratio=\frac{contribution\ margin}{sales}$

$contribution\ margin\ ratio=\frac{1,801,117}{3,105,375}$

                                                  = 0.58

                                                  = 58%

Additional profit = Additional sales × Contribution margin ratio

                           = $160,000 × 58%

                           = $92,800

(4) $Margin\ of\ safety\ in\ units =\frac{Operating\ income}{Contribution\ margin\ per\ unit}$

$Margin\ of\ safety\ in\ units =\frac{353,391}{26.39}$

                                                    = 13,391.09

                                                    = 13,391 units