llt llitone 01 389,120. What is its target monthly operating income? How many ca
ID: 2339087 • Letter: L
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llt llitone 01 389,120. What is its target monthly operating income? How many cars must be sold each month to reach the target monthly net income of S69,120? 3-29 CVP analysis, margin of safety. Suppos e Morrison Corp.'s breakeven point is revenues of $1,100,000. Fixed costs are $660,000. Required: 1. Compute the contribution margin percentage. 2. Compute the selling price if variable costs are $16 per unit. 3. Suppose 75,000 units are sold. Compute the margin of safety in units and dollars. 4. What does this tell you about the risk of Morrison making a loss? What are the most likely reasons for this risk to increase?Explanation / Answer
1. Breakeven point revenues = Fixed costs / Contribution margin percentage
Contribution margin percentage = $660,000 / $1,100,000 = 0.60 or 60%
2. Contribution margin percentage = (Selling price - Variable cost per unit) / Selling price
0.60 = (SP - $16) / SP
0.60 SP = SP - $16
0.40 SP = $16
SP = $40
3. Breakeven sales in units = Revenues ÷ Selling price = $1,100,000 ÷ $40 = 27,500 units
Margin of safety in units = Sales in units – Breakeven sales in units = 75,000 – 27,500 = 47,500 units
Margin of safety = Revenues - Breakeven revenues = (75,000 units × $40) - $1,100,000 = $1,900,000
4. The risk of making a loss is low. Sales would need to decrease by 47,500 units ÷ 75,000 units = 63.33% before Morrison Corp. will make a loss. The most likely reasons for this risk to increase is greater competition, weakness in the economy, or bad management.
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