Question

Rossi Incorporated makes track suits that sell for $50 each. Actual sales are $764,000. Management estimates that fixed costs will total $229,200 and variable costs will be $30 per unit this coming year.

(a)

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Calculate the break-even point in sales dollars using the contribution margin ratio. (Round contribution margin ratio to 4 decimal places, e.g. 15.2964% and final answer to 0 decimal places, e.g. 125.)

Break-even point in dollars

$

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(b)

Calculate the margin of safety in dollars and the margin of safety ratio. (Round margin of safety in dollars to the nearest whole dollar, e.g. 5,275 and margin of safety ratio to 2 decimal places, e.g. 15.25%.)

Margin of safety		$
Margin of safety ratio			%

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Answer 1

Sales in units = $764,000 / $50 = 15,280

(a) Contribution margin = Selling price per unit - Variable costs per unit

= $50 - $30

= $20

Contribution margin ratio = Contribution margin / Sales * 100

= $20 / $50 * 100

= 40%

Break-even point in sales dollars = Fixed costs / Contribution margin ratio

= $229,200 / 40%

= $573,000

(b)

Margin of safety = Sales - Break even sales

= $764,000 - $573,000

= $191,000

Margin of safety ratio = Margin of safety / Sales * 100

= $191,000 / $764,000 * 100

= 25%