PROBLEM I a) Ricky\'s Repair Shop has a monthly target profit of $17,000 Variabl
ID: 2405980 • Letter: P
Question
PROBLEM I a) Ricky's Repair Shop has a monthly target profit of $17,000 Variable costs ate 60% of sales, and monthly fixed costs are $8,000 Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal 2. Express Ricky's margin of safety as a percentage of target sales b) The budgets of four companies yield the following information Company Down Left Right 375,500 Sales Revenue Variable Costs Fixed Costs Operating Income (Loss) Units Sold Contribution Margin per UnitS Contribution Margin Ratio 2,187,500 374,000 77,000225,000 216,00 256,700 85,400 125,000 14,000 3.50 75.00 18.00 80% 20% Requirements 1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent) 2. Which company has the lowest breakeven point in sales dollars? 3. What causes the low breakeven point?Explanation / Answer
Answers
A [given]
% of Variable cost to Sale
60%
B = 100% - A
Hence, CM Ratio =
40%
Requirement 1
A
Target Profit
$ 17,000.00
B
Monthly Fixed Cost
$ 8,000.00
C = A+B
Total Contribution margin required to attain target profit
$ 25,000.00
D [calculated above]
CM Ratio
40%
E = C/D
Sales Required for target profit
$ 62,500.00
F = B/D
Break Even Sale
$ 20,000.00
G = E - F
Margin of Safety Sales in Dollars
$ 42,500.00
Requirement 2
A
Margin of Safety Sales in Dollars
$ 42,500.00
B
Sales Required for target profit
$ 62,500.00
C = (A/B) x 100
Margin of Safety % of target sale
68%
---Note: Few amounts of ‘LEFT’ company cannot be calculated due to limited information.
Requirement 1
Working
Up
Down
Left
Right
A
Sales Revenue
$ 2,187,500.00
$ 385,000.00
$ 375,500.00
$ 467,500.00
B
Variable Cost
$ 1,750,000.00
$ 77,000.00
$ 225,000.00
$ 374,000.00
C
Fixed Cost
$ 180,800.00
$ 216,000.00
$ 8,100.00
D = A - B - C
Operating Income (Loss)
$ 256,700.00
$ 92,000.00
$ 85,400.00
E
Unit Sold
125,000
14,000
2,007
5,194
F = A - B
Contribution margin per unit
$ 3.50
$ 22.00
$ 75.00
$ 18.00
G = (F/A) x 100
Contribution Margin Ratio
20%
80%
40.08%
20%
Working for above calculation:
Working
Up
Down
Left
Right
A
Sales Revenue
2187500
=77000/(100%-80%)
375500
=374000/(100%-20%)
B
Variable Cost
=2187500-(125000*3.5)
77000
225000
374000
C
Fixed Cost
=2187500-1750000-256700
216000
=467500-374000-85400
D = A - B - C
Operating Income (Loss)
256700
=385000-77000-216000
85400
E
Unit Sold
125000
14000
=+(375500-225000)/75
=+(467500-374000)/18
F = A - B
Contribution margin per unit
3.5
=+(385000-77000)/14000
75
18
G = (F/A) x 100
Contribution Margin Ratio
=+(125000*3.5)/2187500
0.8
=+(375500-225000)/375500
0.2
Requirement 2
Up
Down
Left
Right
A
Fixed Cost
$ 180,800.00
$ 216,000.00
$ -
$ 8,100.00
B
Contribution Margin Ratio
20%
80%
40%
20%
C=A/B
Break Even point
$ 904,000.00
$ 270,000.00
$ -
$ 40,500.00
Company with Lowest Break Even point = “Right Company”
Requirement 3
Low Break Even point is caused by Lower Fixed Cost (and, or) Higher CM Ratio.
A [given]
% of Variable cost to Sale
60%
B = 100% - A
Hence, CM Ratio =
40%
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