PROBLEM 4-11 Break-Even Analysis, Margin of Safety, Increase in Profit [LO 3] Ed

Question

PROBLEM 4-11

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 1,600 applications next year. The company's projected income statement for the coming year is:

Required

1. 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 four decimal places) and the break-even sales revenue (round to the nearest dollar).

2. What is the current margin of safety in terms of the number of units? What is the current margin of safety in terms of sales dollars?

3. If Edison wants to have operating income of $500,000 next year, how many applications must it process? (Round to the nearest whole unit.) What dollar level of sales is required to achieve operating income of $500,000? (Round to the nearest dollar.)

4. The office manager for Edison has proposed that Edison increase advertising (a fixed cost) for the upcoming year by $75,000; she feels that this increase in advertising will lead to an increase in sales of $300,000. Prepare a new projected income statement for this proposal. Should Edison increase its advertising to this new level?

Explanation / Answer

1a)Calculaion of Contribution margin per applicaion= Contribution margin per applicaion/No. of Application

=$736,000/$1,600

=$460

b)Calculation of the break-even point in number of applications=Fixed cost/Contribution per application

=$300,000/$460

=$652

c)Contribution margin raio=Contribution margin /sales *100

=$736,000/$1,920,000*100

=38.33%

d)Break even sales revenue= Contribution margin per applicaion/No. of Application*1200

=$736,000/$1,600*1200

=$460*1200

=$552,000

2)a )Margin of safety in terms of the number of units=Acual application-Break even application

=($1920000/1200)-652

948

b) the current margin of safety in terms of sales dollars=948*1200=$1,137,600

3)a)No of Application=Operating Income+Fixed Cost/Contribution per unit

=(500000+300000)/460

=1739

b)Level of sales required to achieve operating income of $500,000=1739*1200=$2,086,957

4) Increase in sales=$300,000

Variable cost(% of sales)Variable cost/sales*100=1184000/1920000*100=61.67% of sales

Increase in application=300000/1200=250

  Increase in fixed cost=300000+75000=$375,000

4)New project Income statement for this proposal

Contribution per unit=851000/1850=460 per application.

No change in contribution per application.Hence,decision is indeterminate.

Particulars Amount(In $) Sales 2220000 Less:Variable cost(61.67% 0f 2220000) 1369000 Contribution 851000 Fixed Cost 375000 Profit 476000

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