Sandy Bank, Inc., makes one model of wooden canoe. And, the information for it f

Question

Sandy Bank, Inc., makes one model of wooden canoe. And, the information for it follows: Number of canoes produced and sold Total costs 500 700 850 Variable costs Fixed costs S 90,000 $126,000 $153,000 119,000 $119,000 $119,000 $209,000 $245,000 $272,000 Total costs Cost per unit 180.00 180.00 180.00 Variable cost per unit Fixed cost per unit Total cost per unit 238.00 170.00 140.00 S 418.00 350.00 320.00 Required 1. Suppose that Sandy Bank raises its selling price to S600 per canoe. Calculate its new break-even point in units and in sales dollars. (Do not round intermediate calculations. Round your final answers to nearest whole number.) New Break-Even Units Canoes Break-Even Sales Revenue 2. If Sandy Bank sells 1,550 canoes, compute its margin of safety in dollars and as a percentage of sales. (Use the new sales price of $600.) Round your answers to the nearest whole number.) Margin of Safety Percentage of Sales

Explanation / Answer

Solution:

Part 1 – New Break Even Point

Break Even Point

Break Even Point is the level of sales at which costs are equal to sales revenue and profit is zero. In other words, at break even point contribution margins are equal to total fixed cost.

Break Even Point (in units) = Total Fixed Cost / Contribution Margin Per Unit

Here,

Contribution Margin Per Unit = Unit Selling Price $600 – Unit Variable Cost $180 = $420

Fixed Costs = $119,000

Break Even Point (in units) = Total Fixed Cost $119,000 / Contribution Margin Per Unit 420

= 283.33 Units or Cones

Break Even Point in Sales Revenue = Total Fixed Cost / Contribution Margin Ratio

Contribution Margin Ratio = contribution Margin $420 / Unit Selling Price 600 = 70% or 0.7

Break Even Point in Sales Revenue = Total Fixed Cost $119,000 / Contribution Margin Ratio 0.7

= $170,000

New Break Even Units = 283.33 Canoes

Break Even Sales Revenue = $170,000

Part 2 --- Margin of Safety

Margin of safety in dollars = Total Sales Revenue – Break Even Sales

Here,

Total Sales Revenue = 1,550 Canoes x Unit Selling Price $600 = $930,000

Break Even Sales Revenue as calculated in part 1 = $170,000

Margin of Safety in dollars = $930,000 - $170,000 = $760,000

Margin of Safety in percentage of sales = Margin of Safety in dollars / Total Sales Revenue x 100

= $760,000 / $930,000 x 100

= 81.72% or 82%

Part 3 –Number of Canoes must sell to generate $120,000

Number of Canoes that Sandy Bank must sell at $600 each to generate $120,000 Profit = (Total Fixed Cost $119,000 + Desired Profit $120,000) / Contribution Margin Per Unit $420

= $239,000 / 420

= 569 Units

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