Question

A company sells Product X for $30 per unit. The Direct Material Cost, Direct labor cost, and Variable MFO costs total $21 per unit. Fixed costs to product the product are $135,000.

How many units of Product X must the company sell in order to break even?

What is the contribution margin ratio for product X?

How many units of Product X must be sold in order for the company to earn a $50,000 profit?

If the company was selling 25,000 units what would be its margin of safety in dollars?

If the company is selling 25,000 units, what would be the operating leverage?

If the company's sales of 25,000 units declinded by 20%, what would be the % decrease in its income from operations?

Answer #1

**Given,**

**selling price per unit = $30**

**total fixed cost = $1,35,000**

**direct material+direct labour+variable mfo per unit =
$21(total variable cost)**

**Therefore from the given information we can find
contribution per unit as follows**

**Contribution per unit = sale price per unit- variable
cost per unit**

**= $30-$21**

**= $9**

** **

**~Calculation of BREAKEVEN PIONT at this
level:**

**we know that ,BREAKEVEN PIONT(units) = FIXED COST ÷
CONTRIBUTION PER UNIT**

**= $1,35,000 ÷ $9**

**= 15,000 units**

**Therefore 15,000 units are required to be sold by the
company in order to be Breakeven.**

**~Calculation of contribution margin
ratio:**

**we know that Contribution ratio = contribution per unit
÷ sale price per unit ×100**

**= $9 ÷ $30 ×100**

**= 30%**

**~Calculation of sale units whe profit is
$50,000.**

**From Income statement we can derive that**

**Total Contribution = profit at that level + fixed
cost**

**= $50,000 + $1,35,000**

**= $1,85,000**

**As we arrived that contribution ratio is
30%**

**then total sales value at $50,000 profit =
$1,85,000÷30%**

**= $6,16,667**

**Therefore sale
units at $50,000 profit = $6,16,667 ÷ $30**

**= 20,555 units**

**~Calculation of Operating leverage when company
is selling 25,000 units:**

**we know that Operating leverage = contribution ÷
EBIT**

**• INCOME STATEMENT**

**sales (25,000 × $30) = $7,50,000**

**less: variable cost(25,000×$21) =
($5,25,000)**

**°Contribution = $2,25,000**

**less: fixed cost = ($1,35,000)**

**°EBIT/PROFIT = $90,000**

**Now Operating leverage = $2,25,000 ÷
$90,000**

**= 2.5 **

**~Calculation of percentage decrease in income when sale
units of 25,000 were declined by 20%**

**Therefore new sale units = 25,000-20%**

**= 20,000 units**

**•INCOME STATEMENT**

**Sales value (20,000 ×30) = $6,00,000**

**less:variable cost(20,000×21) = $4,20,000**

**°Contribution = $1, 80,000**

**less: fixed cost = $1,35,000**

**°EBIT/PROFIT = $45,000**

**here we can observe that profit at 25,000 units=
$90,000**

**Profit at 20,000 units = $45,000**

**percentage of decrease in income =( $90,000-$45,000)
÷90,000**

**= 50%**

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