Use the following information to answer the next three questions (6-8): Derek\'s

Question

Use the following information to answer the next three questions (6-8):

Derek's Drum Depot (DDD) wants to add a new line of drumsticks to its product line. The following data apply to the new drumsticks line.

Budgeted sales 30,000 sets per year

Sales price $5 per set

Variable costs $3 per set

Fixed costs $10,000 per year

1. The break-even point for the new line is _______ sets per year.

A.     500 sets

B.     $5,000

C.     15,000 sets

D.    5,000 sets

2. The margin of safety for DDD is

A.     83%

B.     15,000 sets

C.     19%

D.    6,000 sets

3. How many sets of drumsticks must DDD sell to make a profit of $50,000 on the new line?

A. 2,000 units

B. 10,000 units

C. 20,000 units

D. 30,000 units

Explanation / Answer

1)

Break-even point = Fixed Costs / Contribution per unit

Contribution per unit = Sales - Variable costs per unit = $5 - $3 = $2 per unit.

So, Break-even point = $10,000 / $2 = 5,000 units.

So, option D is the correct option.

2)

Margin of safety = (Current Sales - Break-even Sales) / Current Sales

= (30,000 - 5,000) / 30,000 = 83.33%

So, option A is the correct option.

3)

Number of sets to be sold to earn profit of $50,000 = (Fixed Cost + Target profit) / Contribution per unit

= ($10,000 + $50,000) / $2 = 30,000 units.

So, option D is the correct option.

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