Question

Dupli-Pro Copy Shop provides photocopying service. Next year, Dupli-Pro estimates it will copy 3,000,000 pages at a price of $0.1 each in the coming year. Product costs include: Direct materials $0.015 Direct labor $0.005 Variable overhead $0.002 Total fixed overhead $170,600 There is no variable selling expense; fixed selling and administrative expenses total $40,000. Required: In your computations that involve the contribution margin ratio, do not round the ratio. 1. Calculate the break-even point in units. fill in the blank 1 units 2. Calculate the break-even point in sales revenue. $fill in the blank 2 3. Calculate the margin of safety in units for the coming year. fill in the blank 3 units 4. Calculate the margin of safety in sales revenue for the coming year. $fill in the blank 4 5. What if the total selling and administrative expenses are reduced to $16,600

Answer 1

The break-even point and margin of safety are computed as follows:

1. Break-even point in units is (Fixed cost/Contribution margin per unit), which = 2,700,000 copies ($210,600/$0.078).

2. Break-even point in sales revenue is  (Fixed cost/Contribution margin ratio), which = $270,000 ($210,600/0.78).

3. Margin of safety in units is equal to Normal Sales units - Break-even point in units, which = 300,000 copies (3,000,000 - 2,700,000).

4. Margin of safety in sales revenue is $30,000 ($300,000 - $270,000).

5. If the total selling and administrative expenses are reduced to $16,600, the total fixed costs reduces to $194,000 ($210,600 - $16,600).  Therefore, the answers above will change as follows:

1. Break-even point in units is (Fixed cost/Contribution margin per unit), which = 2,487,179 copies ($194,000/$0.078).

2. Break-even point in sales revenue is  (Fixed cost/Contribution margin ratio), which = $248,718 ($210,600/0.78).

3. Margin of safety in units is equal to Normal Sales units - Break-even point in units, which = 512,821 copies (3,000,000 - 2,487,179).

4. Margin of safety in sales revenue is $51,282 ($300,000 - $248,718).

Data and Calculations:

Photocopying price per copy = $0.1

Direct materials = $0.015

Direct labor = $0.005

Variable overhead = $0.002

Total variable cost = $0.022

Contribution margin per unit = $0.078 ($0.1 - $0.022)

Contribution margin ratio = 78% ($0.078/$0.1 x 100)

Total fixed overhead = $170,600

Fixed selling and administrative expenses = $40,000

Total fixed costs = $210,600 ($170,600 + $40,000)

Thus, the margin of safety is the difference between the normal sales value and the break-even point.

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