Breakeven, Target Profit, Margin of Safety, Operating Leverage Pike Street Taffy

Question

Breakeven, Target Profit, Margin of Safety, Operating Leverage

Pike Street Taffy makes and sells taffy in a variety of flavours in a shop located in the local public market. Data for a recent week are as follows:

Revenue (2,000 kgs @ $4.80 per kg)

$9,600

Cost of ingredients

$3,200

Rent

800

Wages

4,800

8,800

Pretax income

800

Taxes (20%)

160

After-tax income

$ 640

All employees work standard shifts, no matter how much taffy is produced or sold.

REQUIRED

A.

Calculate the breakeven point in units and in revenue.

B.  

Calculate the number of units and the amount of revenues that would be needed for after-tax income of $3,000.

C.  

Calculate the margin of safety in units and the margin of safety percentage.

D.  

Calculate the degree of operating leverage.

Revenue (2,000 kgs @ $4.80 per kg)

$9,600

Cost of ingredients

$3,200

Rent

800

Wages

4,800

8,800

Pretax income

800

Taxes (20%)

160

After-tax income

$ 640

Explanation / Answer

BREAK EVEN POINT= FIXED COST/CONTRIBUTION PER UNIT) * SALES UNIT

B do reverse calculation

c. margin of saftey percentage method =actual sales - breakeven point sales) / actual sales

-unit method = actual sales - breakeven point sales) / sale price per unit

1- unit method = 9600-8400)/4.8 = 250
2. percentage = 1200/9600 = 0.125 or 12.5%

D. degree of operating leveage = contribution / EBIT
= 6400/800
=8

P.UNIT REVENUE 9600 4.8 (9600/2000 LESS COST OF INGREDIENTS 3200 1.6 3200/2000 CONTRIBUTION 6400 3.2 6400/2000 LESS RENT 800 FIXED COST LESS WAGES 4800 PRE TAX INCOME/EBIT 800 LESS TAX 160 AFTER TAX INCOME 640

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