Legal Docs Inc is a legal services firm that files incorporation papers for smal

Question

Legal Docs Inc is a legal services firm that files incorporation papers for small businesses. They charge $1,000 per application. This year's income statement shows the following:


Sales $1,295,000
Variable Expenses $1,023,000
Contribution margin $272,000
Fixed costs $250,000
Profit $22,000


Required:
(a) Compute the break-even point in units.
(b) Compute the contribution margin ratio.
(c) Compute the current margin of safety.
(d) How many applications must the company sell to make a profit of $350,000? (Points : 25)

Explanation / Answer

Sales $1,295,000 Variable Expenses $1,023,000 Contribution margin $272,000 Fixed costs $250,000 Profit $22,000 (a) Compute the break-even point in units. Unit Sold = 1,295,000/1000 = 1,295 Variable Cost Per unit = 1,023,000/1,295 = $789.96 Breakeven in Units = Fixed Cost/ Contribution Margin Per Unit =$250,000 /(1000-790) = 1190.47 (b) Compute the contribution margin ratio. Contribution Margin Ratio = Contribution margin/Sales = 272,000 /1,295,000 = .21 or 21% (c) Compute the current margin of safety. Current margin of safety = Sales – Breakeven Sales = 1,295,000 – 250000/21% = (d) How many applications must the company sell to make a profit of $350,000? (Points : 25) No. Application to be sold =Fixed Cost + Required Profit/Contribution Margin Per Unit = (250000+350000)/300 = 2000

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