18-4 Presto Company makes radios that sell for $30 each. For the coming year, ma

Question

18-4 Presto Company makes radios that sell for $30 each. For the coming year, management expects fixed costs to total $220,000 and variable costs to be $18 per unit. (a) Compute the break-even point in dollars using the contribution margin (CM) ratio. Break-even point $ (b) Compute the margin of safety ratio assuming actual sales are $800,000. (Round margin of safety ratio to 2 decimal places, e.g. 10.50%.) Margin of safety % (c) Compute the sales dollars required to earn net income of $140,000. Required sales $

Explanation / Answer

Selling Price =$30

Variable Cost=$18

Contribution margin=$12

Contribution margin Ratio=12/30=40%

Break even Poin in $= Fixed Cost/Contribution margin Ratio

=220000/40%

=$550000

(b) Margin of Safety Ratio= Actual Sales-Sales at Breakeven point/Actual Sales

=$800,000-$550,000/$800,000

=31.25%

(c) For Net Income to be $140000 Contribution Margin must be $140000+$220000 (Fixed Cost)= $360,000

Contribution margin is 40% hence Sales in $ will be $360000/40%=$900,000

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