Presto Company makes radios that sell for $25 each. For the coming year, managem

Question

Presto Company makes radios that sell for $25 each. For the coming year, management expects fixed costs to total $312,700 and variable costs to be $10.75 per unit.

1.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

2.Compute the margin of safety ratio assuming actual sales are $842,000. (Round margin of safety ratio to 2 decimal places, e.g. 10.50.)

Margin of safety

3.Compute the sales dollars required to earn net income of $170,375.

Break-even point

2.Compute the margin of safety ratio assuming actual sales are $842,000. (Round margin of safety ratio to 2 decimal places, e.g. 10.50.)

Margin of safety

3.Compute the sales dollars required to earn net income of $170,375.

Explanation / Answer

contribution margin=Sales price-Variable costs

=(25-10.75)=$14.25

contribution margin ratio=contribution margin/Sales price

=(14.25/25)=0.57

1.Breakeven sales=Fixed Costs/contribution margin ratio

=(312700/0.57)=$548596(Approx).

2.Margin of safety=Total sales-Breakeven sales

=(842000-548596.4912)=$293403.5088

MOS ratio=MOS/Total sales

=$293403.5088/842000

=0.35(Approx)(or 34.85% approx)[Please note that intermediate calculations have not been rounded off].

3.Target  contribution margin=Fixed cost+Target profits

=(312700+170375)=$483075

Hence sales dollars required=$483075/0.57

=$847,500.

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