Break-Even Analysis, Margin of Safety, Increase in Profit [LO 3] Edison Entrepre

Question

Break-Even Analysis, Margin of Safety, Increase in Profit [LO 3]

Edison Entrepreneur Services, Inc., is a legal services firm that files the paperwork to incorporate a business. Edison charges $1,200 for the incorporation application package and plans to file 1,500 applications next year. The company's projected income statement for the coming year is:


Sales $1,800,000
Less variable expenses
1,110,000

Contribution margin 690,000
Less fixed expenses
300,000

Operating income
$390,000




Compute the contribution margin per application and calculate the break-even point in number of applications. (Round to the nearest whole unit, since it is not possible to file a partial application.) Calculate the contribution margin ratio (round to 2 decimal places, e.g. 5.25) and the breakeven sales revenue (round to 0 decimal places, e.g. 2,510).

Breakeven point (in number of apps) units
Contribution margin ratio %
Breakeven point (in sales dollars) $

Explanation / Answer

Sales (1500 APp*$1200=) $1,800,000 Less var exp $1,110,000 ----------------------------------- Cont margin $690,000 Less FOH $300,000 ------------------------------- Op inc $390,000 ---------------------- Total cont is $690,000 for 1500 App So COnt per app = Total COnt/No of app = $690000/1500 = $460 per app.....Ans (1) BEP = Fixed Exp/COnt per app = $300000/$460 = 653 apps.............Ans (2) BEP Sales Rev = BEP * Sale price per app = 653*$1200 = $783,600......Ans (3) CM Ratio = Contribution Margin / Sales = $690,000/$1800,000 = 38.33%.....Ans (4)

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