Question

Kritzberg Company makes and sells a product at $60 per unit that has unit variable costs of $45. The company’s break-even sales is $180,000. How much profit will the company make if it sells 4,000 units?

Answer 1

Profit can be calculated as= Margin of safety in $ * P/V ratio

Margin of safety may be defined as the difference between actual sales and sales at break-even point.

P/V ratio is an indicator of the rate at which profit is being earned. It can be calculated as Contribution / Sales.

Contribution can further be calculated as Sales - Variable cost.

Sales= $60 * 4,000 units= $240,000

Variable cost= $45 * 4,000 units= $180,000

Contribution= $240,000 - $180,000= $60,000

P/V ratio= ($60,000 / $240,000) * 100= 25%

Margin of safety in $= $240,000 - $180,000= $60,000

Profit= 60,000 / 25%= $240,000