Do It! Review 5-5 Presto Company makes radios that sell for $28 each. For the co

Question

Do It! Review 5-5 Presto Company makes radios that sell for $28 each. For the coming year, management expects fixed costs to total $287,200 and variable costs to be $13.16 per unit. Compute the break-even point in dollars using the contribution margin (CM) ratio. (Round answer to 0 decimal places, e.g. 1,225.) Break-even point LINK TO TEXT Compute the margin of safety ratio assuming actual sales are $856,000. (Round margin of safety ratio to 2 decimal places, e.g. 10.50.) Margin of safety LINK TO TEXT Compute the sales dollars required to earn net income of $215,876. Required sales LINK TO TEXT LINK TO TEXT

Explanation / Answer

Break even point

Contribution Margin (CM) Ratio = (Sales - Variable cost) / Sales

= (28 – 13.16)/28

= 53 %

Break even point (in $) = Total Fixed Cost / Contribution Margin Ratio

                                          = 287200/53%

                                          = $ 541,887

Margin of Safety Ratio = (Actual Sales – Break even point)/ Actual Sales

                                         = (856000 – 541887)/ 856000

                                         = 36.70%

Required Sales to earn Net income of $ 215,876

= Break Even Point + (Desired Net Income / Contribution Margin Ratio)

= 541887 + (215876/53%)

= 541887+407313

= $ 949,200

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