Small Steps sells step stools. Their budget information is shown below. selling

Question

Small Steps sells step stools. Their budget information is shown below.

selling price: $40 per stool

Variable expense:$30 per stool

Fixed Expense:$24,000

use the above information to answer the following questions.

1. Draw a CVP Graph for Small Steps and label the parts.

2. Calculate the Contribution Margin and contribution margin ratio.

3. Calculate Break Even in Units

4. How many steps stools would small steps need to sell to reach a profit of $10,000?

5. If they have a profit(net income) of $10,000 what is their Margin Safety Ratio?

Explanation / Answer

1)

2)

Contribution Margin per unit = Selling Price - Variable cost

Contribution Margin per unit = 40-30

Contribution Margin per unit = $ 10

Contribution margin ratio = Contribution Margin per unit/Sale

Contribution margin ratio = 10/40

Contribution margin ratio = 25%

3)

Break Even in Units = Fixed Cost/Contribution Margin per unit

Break Even in Units = 24000/10

Break Even in Units = 2400 unit

4)How many steps stools would small steps need to sell to reach a profit of $10,000?

No of Step stools need to sell to reach a profit of $10,000 = (Fixed Cost + target Profit)/Contribution Margin per unit

No of Step stools need to sell to reach a profit of $10,000 = (24000+10000)/10

No of Step stools need to sell to reach a profit of $10,000 = 3400

5)If they have a profit(net income) of $10,000 what is their Margin Safety Ratio?

Margin Safety Ratio = (3400-2400)/3400

Margin Safety Ratio   = 29.41%

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