Current operating income for Bay Area Cycles Co. is $32,000. Selling price per u

Question

Current operating income for Bay Area Cycles Co. is $32,000. Selling price per unit is $100, the contribution margin ratio is 20%, and fixed expense is $128,000. Required:

1. Calculate Bay Area Cycle’s break-even point in units and total sales dollars.

2. Calculate Bay Area Cycle’s margin of safety and margin of safety ratio.

Current operating income for Bay Area Cycles Co is $32,000. Selling price per unit is $100, the contribution margin ratio is 20%, and fixed expense is $128,000. Required 1. Calculate Bay Area Cycle's break-even point in units and total sales dollars Break-even units Break-even dollars 2. Calculate Bay Area Cycle's margin of safety and margin of safety ratio Margin of safety Margin of safety ratio

Explanation / Answer

Contribution margin ratio=Contribution margin/Sales

Hence Contribution margin=(100*20%)=$20

1.Breakeven units=Fixed cost/Contribution margin

=(128000/20)=6400 units

Breakeven value=Fixed cost/Contribution margin ratio

=(128000/0.2)=$640,000

2.Current Contribution margin=Fixed cost+Operating income

=(128000+32000)=$160,000

Hence current total sale=(160,000/0.2)=$800,000

Margin of safety=Total sales-Breakeven sales

=(800,000-640,000)=$160,000

=(160,000/100)=1600 units.

MOS ratio=MOS/Total sales

=(160,000/800,000)=20%

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