You are a junior management accountant at Armidale Innovations, which sells stee

Question

You are a junior management accountant at Armidale Innovations, which sells steering wheels. The price per unit of steering wheel is $117. The company is able to produce each steering wheel at a variable cost of $92. The company operates with a total fixed costs investment of $482,000. Required: Your manager has asked you to work out the following using the above supporting information. Work out the required information for your manager showing all your calculations/working. a.How much is the company’s contribution margin per steering wheel? b.What is the company’s Break Even point in number of steering wheel? c.The manager has set a pre-tax profit (operating profit) of $457,000, how many steering wheels are required to be sold to reach this profit target? d.If the company’s actual sales is 40000 steering wheels, what is the company’s margin of safety in units?

Explanation / Answer

.a Contribution margin per steering wheel:

(price per unit)-(Variable cost per unit)=117-92=$25

.b.Break even point in number of steering wheel:

Break even point in units=(Fixed cost)/(Contribution margin per unit)

Break even point in units=482000/25= 19,280

.c.Operating Profit of $457,000

After break even point is reached,

Operating profit=(Number of additional units sold)*(contribution margin per unit)

457000=Number of additional units sold)*25

Number of additional units sold=457000/25=18280

Total units required to be sold=18280+19280= 37,560

.c. Margin of safety =(Actual sales )-(Breakeven point )

Margin of Safety=40000-19280= 20,720

Margin of Safety in units= 20,720 units

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