Narchie sells a single product for $60. Variable costs are 60% of the selling pr

Question

Narchie sells a single product for $60. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $480,000. Current sales total 17,000 units.

1) Narchie:
A) will break-even by selling 20,000 units.
B) cannot break-even because it loses money on every unit sold.
C) will break-even by selling 8,000 units.
D)will break-even by selling 13,333 units.
E) will break-even by selling 1,000,000 units.

2) In order to produce a target profit of $48,000, Narchie's dollar sales must total:
A) $1,320,000.
B) $22,000.
C) an amount other than those above.
D) $39,560.
E) $1,265,000.

3) If Narchie sells 22,000 units, its safety margin will be:
A) $720,000.
B) $120,000.
C) $600,000.
D) an amount other than those above.
E) $240,000.

Explanation / Answer

Contribution margin=-Sales-Variable costs

=(100-60)%=40% of sales

(0.4*60)=$24

1.Breakeven point=Fixed cost/Contribution margin

=(480,000/24)

=20000 units(A).

2.Target Contribution margin=Fixed cost+Target profits

=(480000+48000)=$528000

Hence units to be sold=(528000/24)=22000 units

=(22000*60)=$1,320,000

3.Margin of safety=Total sales-Breakeven sales

=22000-20000 units

=20000 units

=(2000*60)

=$120,000

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