Narchie sells a single product for $90. Variable costs are 60% of the selling pr
ID: 2521210 • Letter: N
Question
Narchie sells a single product for $90. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $630,000. Current sales total 15,000 units.
1.) Narchie:
a.) will break-even by selling 17,500 units.
b.) will break-even by selling 5,500 units.
c.) cannot break-even because it loses money on every unit sold.
d.) will break-even by selling 10,833 units.
e.) will break-even by selling 997,500 units.
2.) In order to produce a target profit of $90,000, Narchie's dollar sales must total:
a.) $20,000.
b.) an amount other than those above.
c.) $81,560.
d.) $1,745,000.
e.) $1,800,000.
3.) If Narchie sells 20,000 units, its safety margin will be:
a.) $1,125,000.
b.) $1,350,000.
c.) an amount other than those above.
d.) $225,000.
e.) $450,000.
Explanation / Answer
1)break-even point ( in Units ) = Fixed cost / Contribution Margin Per Unit
= $630,000 /$ 36 Per Unit
= 17,500 Units
Hence the correct answer is
a.) will break-even by selling 17,500 units.
Note :
Contribution Margin Per Unit = Selling Price Per Unit - Variable Cost Per Unit
= $ 90 - ( $ 90 *60%)
= $ 36 Per Unit
2. ) target profit = $90,000
Hence, Target Contribution Margin = target profit + Fixed Cost
= $ 90,000 + $630,000
= $ 720,000
Contribution Margin Per Unit = $ 36 Per Unit
Contribution Margin Ratio = Contribution Margin / Sales *100
= $ 36 /$90 *100
= 40%
Hence, dollar sales required to atttain the atrget profit =Target Contribution Margin / Contribution Margin Ratio
= $ 720,000 / 40%
= $ 1,800,000
Hence the correct answer is e.) $1,800,000
3) Margin of Safety = Actual Sales - Break Even Sales
= ( 20,000 Units * $ 90 ) - ( 17,500 Units * $ 90 )
= $ 225,000
Hence the correct answer is d) $ 225,000
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