Break-Even in Units and Sales Dollars, Margin of Safety Drake Company produces a

Question

Break-Even in Units and Sales Dollars, Margin of Safety

Drake Company produces a single product. Last year's income statement is as follows:

Required:

1. Compute the break-even point in units and sales revenue. In your computations, round the contribution margin per unit to the nearest cent and round the contribution margin ratio to four decimal places. Round your final answers to the nearest whole unit or dollar.

2. What was the margin of safety in dollars for Drake Company last year? Round your final answer to the nearest whole dollar.
$

3. Suppose that Drake Company is considering an investment in new technology that will increase fixed costs by $243,700 per year, but will lower variable costs to 44 percent of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming Drake makes this investment. Round all amounts to the nearest dollar.

What is the new break-even point in units, assuming the investment is made? In your computations, round the unit contribution margin to the nearest cent. Round your final answer to the nearest whole unit.

Sales (20,000 units) $1,236,000 Less: Variable costs 808,000    Contribution margin $428,000 Less: Fixed costs 274,100    Operating income $153,900

Explanation / Answer

1.

Contribution margin per unit = Contribution margin / Number of units

= 428,000 / 20,000

= 21.4

Contribution margin ratio = Contribution margin / Sales

= 428,000 / 1,236,000

= 34.6278%

2.

Margin of safety in dollars = Sales revenues - Breakeven revenues

= 1,236,000 - 791,561

= 444,439

3.

Drake Company

Budgeted Income Statement

Contribution margin per unit = Contribution margin / Number of units

= 692,160 / 20,000

= 34.608

Breakeven point in units = Fixed costs / Contribution margin per unit

= 517,800 / 34.608

= 14,962 units

Breakeven point in units Fixed costs / Contribution margin per unit 12,808 units (274,100/21.4) Breakeven point in dollars Fixed costs / Contribution margin ratio 791,561 (274,100/34.6278%)

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.