Question

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Youngsville Industries Inc. expects to maintain the same inventories at the end of 20Y5 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows

Estimated Fixed Cost

Estimated Variable Cost (per unit sold)

Production Costs:



Direct Materials


$48


Direct Labor


$38


Factory Overhead


$150,000


$25

Selling Expenses:



Sales salaries and commissions


$125,000


$10


Advertising


$50,000



Travel


$15,000



Miscellaneous selling expense


$10,000


$2

Administrative Expenses:



Office and officers' salaries


$140,000



Supplies


$10,000


$5


Miscellaneous administrative expense


$10,000


$2

Total


$510,000


$130



It is expected that 22,175 units will be sold at a price of $170 a unit. Maximum sales within the relevant range are 27,500 units.

Answer 1

Answer:

Giving the following information:

Units sold= 450,000

Total Sales= $12,150,000

Total variable cost= $6,925,500

Total fixed cost= $3,242,673

First, we need to calculate the unitary selling price and variable cost. Then, we calculate the contribution margin.

Selling price= 12,150,000/450,000= $27

Unitary variable cost= 6,925,500/450,000= $15.39

Contribution margin per unit= 27 - 15.39= $11.61

To calculate the contribution margin ratio, we need to use the following formula:

Contribution margin ratio= contribution margin/ selling price

Contribution margin ratio= 11.61/27

Contribution margin ratio= 0.43

To calculate the break-even point both in units and dollars, we need to use the following formulas:

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

Break-even point in units= 3,242,673 / 11.61= 279,300 units

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

Break-even point (dollars)= 3,242,673/0.43= $7,541,100

Finally, we need to incorporate the desired profit to the break-even point formula:

Break-even point in units= (3,242,673 + 426,087) / 11.61

Break-even point in units= 316,000 units

Step-by-step explanation: