Question

Blossom Company makes radios that sell for $30 each. For the coming year, management expects fixed costs to total $210,000 and variable costs to be $18 per unit.

Compute the break-even point in dollars using the contribution margin (CM) ratio.

Break-even point

$

Compute the margin of safety ratio assuming actual sales are $700,000. (Round margin of safety ratio to 2 decimal places, e.g. 10.50.)

Margin of safety

%

Compute the sales dollars required to earn net income of $150,000.

Required sales

$

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Answer 1

1. Breakeven point in dollars using CM ratio: $525,000

Calculation:

CM ratio = Selling price- variable costs/ selling price

= $30-$18/$30

=40%

Breakeven point= Fixed costs/ CM ratio

=$210,000/40%

=$525,000

2. Margin of safety ratio: 25%

Calculation:

Margin of safety %= Actual sales- breakeven sales/ actual sales

= $700,000-$525,000/$700,000

=25%

3. Required sales $:   $900,000

Calculation:

Required sales $: ( Fixed cost+ Target profit)/ CM ratio

=($210,000+$150,000)/40%

=$360,000/40%

=$900,000