AE18-16 (b, c) Grissom Company estimates that variable costs will be 60% of sale

Question

AE18-16 (b, c)
Grissom Company estimates that variable costs will be 60% of sales, and fixed costs will total $812,700. The selling price of the product is $7.


Compute the break-even point in (1) units and (2) dollars. (Round answers to 0 decimal places, e.g. 205,000.)

Breakeven sales in units units
Breakeven sales in dollars $



Compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual sales are $2.70 million. (Round answers to 0 decimal places, e.g. 205,000.)

Margin of safety in dollars $
Margin of safety ratio %

Explanation / Answer

Breakeven sales in units = 290,250 units Breakeven sales in dollars = $2,031,750 Margin of safety in dollars = $668,250 Margin of safety ratio = 24.75% Selling price is $7, and variable cost is $4.20 (60% of sale price). So that equates to a profit of $2.80 per unit. To compute the break-even point $2.80x = $812,700 where x = number of units sold x = $812,700/$2.80 = 290,250 units Sales from that many units = 290,250 * $7 = $2,031,750 Part 2 If sales are $2,700,000 then the margin of safety is: $2,700,000 - $2,031,750 = $668,250 Margin of safety ratio is: $668,250 / $2,700,000 = 24.75%

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