Question

Presto Company makes radios that sell for $26 each. For the coming year, management expects fixed costs to total $220700 and variable costs to be $15.34 per unit.

A. Compute the break even point in dollars using the contribution margin (CM) ratio. (round answers to 0 decimal places)

b. Compute the margin of safety ratio assuming sales are $848000. (round margin of safety ratio to 2 decimal places.)

c. compute the sales dollars required to earn net income of $115090

Answer 1

A. Contribution margin per unit = Selling price per unit - Variable costs per unit

= $26 - $15.34

= $10.66

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $10.66 / $26

= 0.41

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

= $220,700 / 0.41

= $538,293

b. Margin of safety ratio = (Sales - Break even sales) / Sales * 100

= ($848,000 - $538,293) / $848,000 * 100

= 36.52%

c. Dollar sales required = (Fixed costs + Desired profit) / Contribution margin ratio

= ($220,700 + $115,090) / 0.41

= $819,000