Question

The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company’s profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them.

Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 721,000 units at an average selling price of $3.50 per unit. The variable costs were$1,766,450, and the fixed costs were $529,935.

1. What is the products contribution margin ratio?

2. What is the company's break even point in units and in dollars for this product?

3. What is the margin of safety, both in dollars and as a ratio?

4. If sales increase by 51,000 units and the cost behaviors do not change, how much will income increase on this product.

Answer 1

1.Contribution Margin Ratio = (Sales – Variable costs)/Sales

= (721000*3.50 – 1,766,450)/2,523,500

= 30%

2.Break even point in units = Fixed costs/Contribution Margin per unit

= 529,935/1.05

= 504,700 units

In Dollars = Fixed costs/CM ratio

= 529,935/30%

= $1,766,450

3.Margin of Safety in Dollars = Sales – Break even Sales

= 2,523,500 – 1,766,450

= $757,050

Ratio = Margin of Safety Dollars/Sales

= 757,050/2,523,500

= 30%

4.Increase in income = Increase in Contribution Margin as Fixed costs do not change with change in volume

= 51000*1.05

= $53,550