Exercise 5 Magnolia Company is considering the production and sale of a new prod

Question

Exercise 5
Magnolia Company is considering the production and sale of a new product with the following sales and cost data: unit sales price, $350; unit variable costs, $180; total fixed costs, $399,500; and projected sales, $910,000. Round your answers to the nearest whole unit or dollar.
(a) Calculate break-even in units.
(b) Calculate break-even in dollars (use four decimal places when calculating the contribution margin ratio).
(c) Calculate number of units that would need to be sold to generate an after-tax profit of $420,000 assuming a 30% tax rate.
(d) Calculate dollar sales that would be needed to generate the same profit as above.
(e) Calculate the margin of safety stated as a percentage using the $910,000 projected sales level.
Be sure to label each calculation and show all calculations.

Explanation / Answer

a) Calculation of break even point in units: Contribution per unit= Selling price- variable cost per unit                                          = 350-180=$170 Break even sale in units= Fixed cost/ contribution per unit                                               = 399500/170=2350 units Break even point in unit sales= 2350 units b) Calculation of break even point in dollars: Contribution Margin ratio= Contribution per unit/ Selling price*100= 170/350*100= 48.5714% Contribution margin ratio= 48.5714% Break even point in dollar sales= Fixed cost/ CM ratio                                                                =399500/0.485714= $822500 Break even point in dollar sales=$822500 c) Calculation of number of units: Profit= 420000*0.7= $294000 Number of units= (Fixed cost+ profit)/ contribution per unit                                             =(294000+399500)/170=4079.41 units Number of units= 4079 units d) Calculation of dollar sales: Dollar sales= units* selling price= 4079*350= $1427650 Dollar sales= $1427650 e) Calculation of margin of safety as a percentage of sales Margin of safety= total sales- break even sales= 910000-822500= $87500 Margin of safety as a percentage of sales= 87500/910000*100=9.62% Margin of safety as a percentage of sales=9.62%

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