6. 10.00 points Problem 8-7 Computing Break-Even and Margin of Safety (LO2 - CC6

Question

6. 10.00 points Problem 8-7 Computing Break-Even and Margin of Safety (LO2 - CC6, 8) Draaksh Corporation sells premium quality wine for $110 per bottle. Its direct materials and direct labour costs are $21 and $18 respectively per bottle. It pays its direct labour employees a wage of $24 per hour. The company performed a regression analysis using the past 12 months' data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base: y $154,200+$22.50x Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $34,400 per month for sales promotions, additionally, it has decided to offer a sales commission of $5.75 per bottle to its sales personnel. Administrative expenses are expected to be $25,200 per month. Required 1. Compute the expected total variable cost per bottle and the expected contribution margin ratio. Total variable cost Contribution margin ratio 201 % 2. Compute the annual break-even sales in units and dollars. Annual breakeven sales in units Annual breakeven sales in dollars Draaksh has budgeted sales of $7.5 million for the next fiscal year. What is the company's margin of safety in dollars and as a percentage of budgeted sales? 3. Margin of safety Budgeted sales

Explanation / Answer

Answer 1

Total Variacle cost = Direct Material+ Direct Labour + Manufaturing Overheard + Sales Comminssion

= $21 + $18 + $22.50 + $5.75 = $67.25  

Contribution Marfin Ratio = (Sales - Variable cost) / Sales = ($110 -  $67.25) / $110 = 38.86 %

Answer 2

Break even Sales in Units = Fixed Cost / (Sales - Variable cost)

= ($154,200 + $34,400 + $25,200) / ($110 -  $67.25) = 5,001 units

Break even Sales in sales $  = Break even Sales in Units * selling price per unit = 5,001 units*$110 = $550,110

Answer 3

Margin of Safety = Budgeted Sales - Break even sales in $ = $7,500,000 - $550,110 = $6,949,890

Margin of Safety as % of Budgeted Sales = $6,949,890 / $7,500,000 = 92.66 %

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