Davies shows the following information for the next year for its single product,

Question

Davies shows the following information for the next year for its single product, ceramic pots.

Selling price: $15 per unit

Variable cost: $12 per unit

Fixed cost = $42,000

Requirement 1: Compute the break-even point in units and sale dollars. Show your computations (6 points)

Requirement 2: What amount of sales revenue would Davies need to realize next year in order to generate a net income of $60,000 after tax (assume a tax rate of 20%). Show your computations (10 points)

Requirement 3: Using the sales revenue computed in #2, compute the margin of safety in sales dollars. (4 points)

Explanation / Answer

1) Contribution Margin per unit = Selling price per unit - Variable cost per unit

= $15 per unit - $12 per unit = $3 per unit

Break Even point in units = Fixed Cost/Contribution Margin per unit

= $42,000/$3 per unit = 14,000 units

Break Even Sales dollars = 14,000 units*$15 per unit = $210,000

2) Required Net income before tax = Net Income after tax/(1 - tax rate)

= $60,000/(1-20%) = $60,000/80% = $75,000

Required Contribution = Fixed Costs+Required Net Income before tax

= $42,000+$75,000 = $117,000

Required sales in units = Required Contribution/Contribution Margin per unit

= $117,000/$3 per unit = 39,000 units

Sales Revenue required = 39,000 units*$15 per unit = $585,000

3) Margin of Safety in sales dollars = Sales Revenue - Break Even Sales Revenue

= $585,000 - $210,000 = $375,000

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

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