Question

A company’s flexible budget for 25,000 units of production showed sales, $82,500; variable costs, $25,000; and fixed costs, $20,000. The contribution margin expected if the company produces and sells 20,000 units is:

Multiple Choice

• $82,500.

• $102,500.

• $46,000.

• $20,000.

• $25,000.

The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. If Burkett Corporation is able to achieve the budgeted level of sales, its margin of safety in dollars would be (Do not round intermediate calculations.):

Sales (55,000 units)				$	990,000
Costs:
Direct materials	$	301,000
Direct labor		240,500
Fixed factory overhead		102,500
Variable factory overhead		150,500
Fixed marketing costs		110,500
Variable marketing costs		50,500			955,500
Pretax income				$	34,500

Multiple Choice

• $138,000.

• $202,000.

• $256,125.

• $150,500.

• $238,875.

Answer 1

Selling price per unit = $82,500 / 25,000 = $3.3

Variable costs per unit = $25,000 / 25,000 = $1

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

= $3.3 - $1

= $2.3

Contribution margin = 20,000 units * $2.3 per unit

= $46,000

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Contribution margin ratio = (Sales - Variable costs) / Sales

= [$990,000 - ($301,000 + $240,500 + $150,500 + $50,500)] / $990,000

= 0.25

Break-even revenues = Fixed costs / Contribution margin ratio

= ($102,500 + $110,500) / 0.25

= $852,000

Margin of safety in dollars = Revenues - Break-even revenues

= $990,000 - $852,000

= $138,000