E22-13. Prepare a CVP graph and compute break-even point and margin of safety. (

Question

E22-13. Prepare a CVP graph and compute break-even point and margin of safety. (LO 4, 5) Glacial Company estimates that variable costs will be 62.5% of sales, and fixed costs will total $600,000. The selling price of the product is $4. Instructions (a) Prepare a CVP graph, assuming maximum sales of $3,200,000. (Note: Use $400,000 increments for sales and costs and 100,000 increments for units.) (b) Compute the break-even point in (1) units and (2) dollars. (c) Assuming actual sales are $2 million, compute the margin of safety in (1) dollars and (2) as a ratio.

Explanation / Answer

Amount Per unit Sales 3200000 4 Less Variable cost 2000000 2.5 Contribtion margin 1200000 1.5 Contribution margin ratio 37.5% 1 Breakeven in units = Fixed cost / contribution margin per unit Fixed cost 600000 Contribtion margin 1.5 Break even in units 400000 units 2 Breakeven in dollars = Fixed cost / contribution margin ratio Fixed cost 600000 Contribution margin ratio 37.50% Breakeven in dollars 1600000 3 Actual sales 3200000 Breakeven sales in dollars 1600000 Margin of safety 1600000 Margin of safety ratio = Margin of safety / actual sales Margin of safety 1600000 Actual sales 3200000 Margin of safety ratio 50%

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