Davies shows the following information for the next year for its single product,

Question

Davies shows the following information for the next year for its single product, ceramic pots.

Selling price: $15 per unit

Variable cost: $12 per unit

Fixed cost = $42,000

Requirement 1: Compute the break-even point in units and sale dollars. Show your computations (6 points)

Requirement 2: What amount of sales revenue would Davies need to realize next year in order to generate a net income of $60,000 after tax (assume a tax rate of 20%). Show your computations (10 points)

Requirement 3: Using the sales revenue computed in #2, compute the margin of safety in sales dollars. (4 points)

Explanation / Answer

Contribution margin=Sales-Variable costs

= (15-12)=$3 per unit

1.Breakeven=Fixed cost/Contribution margin

=(42000/3)=14000 units

=(14000*15)=$210,000

2.Befotre tax income required=$60,000/(1-0.2)=$75000

Target Contribution margin=Fixed cost+Target before tax income

=(42000+75000)=$117000

Hence sales required=(117000/3)=39000 units

=(39000*15)=$585000.

3.MOS=Total sales-Breakeven sales

=(585000-210000)=$375000.

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