Question

Break-Even Units, Contribution Margin Ratio, Margin of Safety

Khumbu Company's projected profit for the coming year is as follows:

	Total			Per Unit
Sales	$2,030,000			$40.00
Total variable cost	568,400			11.20
Contribution margin	$ 1,461,600			$ 28.8
Total fixed cost	539,980
Operating income	$ 921,620

Required:

1. Compute the break-even point in units. If required, round your answer to nearest whole value.
units

2. How many units must be sold to earn a profit of $240,000? If required, round your answer to nearest whole value.
units

3. Compute the contribution margin ratio. If required, round your answer to nearest whole number.
%

Using the rounded ratio from above, compute the additional profit that Khumbu would earn if sales were $160,000 more than expected.
$

4. For the projected level of sales, compute the margin of safety in units.
units

Answer 1

1) CM = Sales price per unit – Variable costs per unit = 40 - 11.20 = 28.80
Break-Even point (units) = Fixed Costs / (Sales price per unit – Variable costs per unit)
= 539,980 / 28.80 = 18,749 units
2) Quanity = (FC + Profit) / (Sales price per unit – Variable costs per unit)
Quanity = (539,980 + 240,000) / 28.80 = 27,083 units
3) CM ratio = CM / Sales = 1,461,600 / 2,030,000 * 100 = 72%
Additional profit = Additional sales * CM ratio = 160,000 * 72% = 115,200
4) Margin of safety (in units) = Operating income / CM per unit
Margin of safety (in units) = 921,620 / 28.80 = 32,001 units