Presque Isle Seating Co., a manufacturer of chairs, had the following data for 2

Question

Presque Isle Seating Co., a manufacturer of chairs, had the following data for 2011:

Sales 2,900 units
Sales price $50 per unit
Variable costs $20 per unit
Fixed costs $18,420

Compute the following: (Do not round intermediate calculations. Round ratios to 2 decimal places e.g. 15.75% and all other answers to 0 decimal places, e.g. 125.)

a. Contribution margin ratio %
b. Break-even point in dollars $
c. Margin of safety in dollars $
Margin of safety ratio %

d. If the company wishes to increase its total dollar contribution margin by 41% in 2012, by how much will it need to increase its sales if all other factors remain constant?

Explanation / Answer

a. Contribution margin ratio = (sales price – variable costs)/sales price = (50 – 20)/50 = 0.6 = 60.00%

b. Break-even point in dollars = fixed costs/contribution margin ratio = 18,420/.6 = $30,700

c. Margin of safety in dollars = sales – break-even point = 2,900*50 – 30,700 = $114,300

d. Margin of safety ratio = margin of safety/sales = 114,300/(2,900*50) = 0.7883 = 78.83%

e. contribution margin = 2,900*50*.6 = 87,000

41% of 87,000 = 35,670

For a contribution margin of 87,000 + 35,670 = 122,670, you would need sales of 122,670/.6 = 204,450.

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