Presto Company makes radios that sell for $28 each. For the coming year, managem

Question

Presto Company makes radios that sell for $28 each. For the coming year, management expects fixed costs to total $197,800 and variable costs to be 18.76 per unit. Compute the break-even point in dollars using the contribution margin (CM) ratio. (Round answer to 0 decimal places, e.g. 1,225.) Break-even point s Compute the margin of safety ratio assuming actual sales are $859,000. (Round margin of safety ratio to 2 decimal places, e.g. 10.50.) Margin of safety Compute the sales dollars required to earn net income of $121,904 Required sales

Explanation / Answer

1. Contribution Margin = Price - Variable cost

= 28 - 18.76 = 9.24

Break even point (Units) = Fixed cost / Contribution margin

= 197,800 / 9.24

= 21,406.92 ~ 21,407

Break even revenue = Break even units * Price

= 21,407*28

= $ 599,396

2. Margin of safety = Actual projected sales revenue - Break even sales revenue

= $ 859,000 - $ 599,396

= $ 259,604

Margin of safety ratio = Margin of safety / Actual projected sales revenue

= $ 259,604 / $ 859,000

= 0.30

3. Expected Sales dollars = Expected net income +Break Even Sales Revenue

= $ 121,904 + $ 599,396

= $ 721, 300

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