1. Calculate the break-even point in units. 2. Calculate the margin of safety in

Question

1.  Calculate the break-even point in units.

2. Calculate the margin of safety in units.

3.  Calculate the margin of safety in dollars.

4.  Suppose actually experiences a price decrease next year while all other costs and the number of units sold remain the same.  Would this increase or decrease risk for the company?  (Hint:  Consider what woul happen to the number of break-even units and the margin of safety.)

Yuan   Company produces and sells strings of colorful indoor/outdoor lights for   holiday display to retailers for $8.42 per string.  The variable costs per string are as   follows:                                                       Direct Materials                                                $1.87                                                       Direct Labor                                                          1.70                                                       Variable factory overhead                           0.57                                                       Variable selling expense                              0.42 Fixed manufacturing cost   totals $245,650 per year.   Administrative cost (all fixed) totals $301,505.  Yuan expects to sell 225,000 strings of   light next year. Required:

1.  Calculate the break-even point in units.

2. Calculate the margin of safety in units.

3.  Calculate the margin of safety in dollars.

4.  Suppose actually experiences a price decrease next year while all other costs and the number of units sold remain the same.  Would this increase or decrease risk for the company?  (Hint:  Consider what woul happen to the number of break-even units and the margin of safety.)

Explanation / Answer

Part 1 Fixed manufacturing costs $245,650 Fixed administrative costs $301,505 Total fixed costs $547,155 Selling price per unit $8.42 Variable costs per unit $4.56 hint: this will be the total of the variable costs listed in the exercise Contribution margin per unit $3.86 hint: remember that contribution margin is the selling price less the variable costs Break-even units 141,750 hint: Break-even units = fixed costs / unit contribution margin Part 2 Expected sales in units 225,000 Break-even units 141,750 Margin of safety in units 83,250 hint: will be the difference between the expected sales and break-even sales Part 3 Expected sales in units 225,000 Selling price per unit $8.42 Expected sales revenue $1,894,500 Break-even units 141,750 Selling price per unit $8.42 Break-even sales revenues $1,193,535 Margin of safety in dollars $700,965 hint: will be the difference between the expected sales and break-even sales

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