4 (10 points). Christabella, daughter of John Milton, produces and sells self-he
ID: 2554589 • Letter: 4
Question
4 (10 points). Christabella, daughter of John Milton, produces and sells self-help kits to siblings to put away differences between them so siblings can work towards common goals. Last year, Christabella sold 198,400 kits (units). The income statement for Christabella, for last year is as follows Sales Less: Variable expenses Contribution margin Less: Fixed expenses Operating income $992,000 545,600 $446,400 $266,400 a. Compute the break-even point in units and in revenues. Compute the margin of safety in sales revenue for last year b. Suppose that the selling price decreases by 8 percent. Will the break-even point increase or decrease? Recompute the break-even point in units. (Round up to the nearest whole unit.) c. Suppose that the variable cost per unit decreases by $0.20. Will the break-even point increase or decrease? Recompute the break-even point in units. (Round up to the nearest whole unit.) d. Can you predict whether the break-even point increases or decreases if both the selling price and the unit variable cost decrease? Recompute the break-even point in units incorporating both of the changes in Requirements 2 and 3. (Round up to the nearest whole unit.) e. Assume that total fixed costs increase by $50,000. (Assume no other changes from the original data.) Will the break-even point increase or decrease? Recompute it. (Round up to the nearest whole unit.Explanation / Answer
Sales = 992,000
Sales in units = 198,400
Selling price per unit = 992,000 / 198,400 = 5
Variable cost per unit = 545,600 / 198,400 = 2.75
a.
Contribution margin per unit = Selling price per unit - Variable cost per unit
= 5 - 2.75 = 2.25
Contribution margin ratio = Contribution margin per unit / Selling price per unit
= 2.25 / 5
= 45%
Breakeven point in units = Fixed costs / contribution margin per unit
= 180,000 / 2.25
= 80,000 units
Breakeven point in revenues = Fixed costs / Contribution margin percentage
= 180,000 / 45%
= 400,000
Margin of safety in sales revenues = Sales revenues - Breakeven revenues
= 992,000 - 400,000
= 592,000
b.
New selling price = 5 - (5*8%) = 4.6
Breakeven point will increase (as more number of units has to be sold to cover up the reduction in sales)
Contribution margin per unit = Selling price per unit - Variable costs per unit
= 4.6 - 2.75
= 1.85
Breakeven point in units = Fixed costs / Contribution margin per unit
= 180,000 / 1.85
= 97,298
c.
New variable cost per unit = 2.75 - 0.2 = 2.55
The breakeven point will decrease (as expenses decreases)
Contribution margin per unit = Selling price per unit - Variable costs per unit
= 5 - 2.55
= 2.45
Breakeven point in units = Fixed costs / Contribution margin per unit
= 180,000 / 2.45
= 73,470
d.
Breakeven point increases with decrease in selling price
Breakeven point decreases with decrease in variable cost
If both happen at a time, the change in Breakeven cannot be predicted
Contribution margin per unit = Selling price per unit - Variable costs per unit
= 4.6 - 2.55
= 2.05
Breakeven point in units = Fixed costs / Contribution margin per unit
= 180,000 / 2.05
= 87,805
e.
Breakeven point increases (as the an increase in expenses)
Contribution margin per unit = Selling price per unit - Variable costs per unit
= 5 - 2.75
= 2.25
Breakeven point in units = Fixed costs / Contribution margin per unit
= (180,000+50,000) / 2.25
= 102,223
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.