Question

# A company’s contribution format income statement for last month is given below: Sales (40,000 units ×...

A company’s contribution format income statement for last month is given below:

 Sales (40,000 units × \$21 per unit) \$ 840,000 Variable expenses 588,000 Contribution margin 252,000 Fixed expenses 201,600 Net operating income \$ 50,400

The company considers renovating its operations by purchasing a new machine that would reduce variable expenses by \$6.30 per unit. However, fixed expenses would increase to a total of \$453,600 each month. Using the new machine would not cause a change in monthly sales quantity or price per unit. What would the company's margin of safety in dollars be if it purchases and uses the new machine?

 Total per unit Sales (40,000 units x \$21 per unit) \$ 840,000 \$ 21.00 Variable expenses \$ 336,000 \$ 8.40 Contribution margin \$ 504,000 \$ 12.60 Fixed expenses \$ 453,600 Net operating income \$ 50,400
 Old variable expense per unit = \$588,000/40,000 units = \$14.7 per unit New variable expense per unit = \$14.7 - \$6.30 = \$8.40 per unit Break even in sales units = Fixed cost/ Contribution margin per unit Break even in sales units = \$453,600 / \$12.60 = 36,000 units Margin of safety in units = 40,000 - 36,000 = 4,000 units Margin of safety in dollars = 4,000 units x \$21 per unit = \$84,000 Answer: \$84,000

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