Madison Company produces a single product which sells for $40 per unit. Fixed ex
ID: 2398838 • Letter: M
Question
Madison Company produces a single product which sells for $40 per unit. Fixed expenses total $9,000 per month, and variable expenses are $25 per unit. During the current month, sales, in units, totaled 750 units.
Using the information above, match each of the items listed below with the appropriate amount.
Contribution margin per unit.
Contribution margin ratio.
Break-even point in units.
Break-even point in dollars.
Total contribution margin at the break-even point.
Net income during the current month.
Margin of safety during the current month.
Margin of safety rate during the current month.
Operating leverage during the current month.
Sales, in units, needed for a target profit of $4,500.
Sales, in dollars, needed for a target profit of $3,750.
If sales next month increase by 25%, what will be the net income?
- A. B. C. D. E. F. G. H. I. J. K. L.Contribution margin per unit.
Contribution margin ratio.
Break-even point in units.
Break-even point in dollars.
Total contribution margin at the break-even point.
Net income during the current month.
Margin of safety during the current month.
Margin of safety rate during the current month.
Operating leverage during the current month.
Sales, in units, needed for a target profit of $4,500.
Sales, in dollars, needed for a target profit of $3,750.
If sales next month increase by 25%, what will be the net income?
Explanation / Answer
(A) Contribution Margin pu:-
SP – VC = 40 – 25 = $ 15
(B) Contribution Margin Ratio:-
Contribution/Sales
= 15/40 = 37.5%
(C) BEP(in units):-
Fixed cost/contribution pu
= 9000/15 = 600 units
(D)BEP (in $) :-
Fixed cost/contribution margin ratio
= 9000/37.5% = $ 24000
(E)Total contribution margin at BEP :-
At BEP contribution = Fixed cost
= $ 9000
(F)Net Income durng current month :-
Sale – VC – FC
(750 * 40) – (750 * 25) – 9000
= $2250
(G) Margin of Safety :-
In units=Actual Sale – BEP
= 750 – 600 = 150 units
(H) Margin of Safety rate:-
In %age = (Actual Sale – BEP)/Actual Sale
= 150/750 = 20%
(I) Operating Leverage :-
Contribution margin/Operating Income
= ($ 15 * 750 units)/2250 = 5
(J)Target Profit = 4500
Sale – VC – FC = Profit
Let “X” be the units sold
(X * 15) – 9000 = 4500
X = 900 units
(K) Target Profit = 3750
(X * 15) – 9000 = 3750
X = 850 units
In $ = 850*40 = $ 34000
(L) In next month, sale increase by 25%
Revised contribution = (750 units * 125%) * 15 = 14062.5
Income = 14062.5 – 9000 = 5062.5
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