Question

1. Santana Rey expects sales of Business Solutions’s line of computer workstation furniture to equal 300 workstations (at a sales price of $3,900 each) for 2018. The workstations’ manufacturing costs include the following.

Direct materials	$	720		per unit
Direct labor	$	390		per unit
Variable overhead	$	100		per unit
Fixed overhead	$	19,200		per year

The selling expenses related to these workstations follow.

Variable selling expenses	$	40	per unit
Fixed selling expenses	$	3,700	per year

Santana is considering how many workstations to produce in 2018. She is confident that she will be able to sell any workstations in her 2018 ending inventory during 2019. However, Santana does not want to overproduce as she does not have sufficient storage space for many more workstations.

Complete the following income statements using variable costing.

BUSINESS SOLUTIONS
Variable Costing Income Statements
Production volume (units)	300 workstations	320 workstations
Sales volume (units)	300 workstations	300 workstations
Sales	$1,170,000
Less: Variable costs
Variable overhead		387,200
Variable selling expenses	12,000	12,800
Total variable costs	12,000	400,000
	1,158,000	-400,000
Net income (loss)	$1,158,000	$(400,000)
Under variable costing, can a company increase its net income by increasing production?

2. Business Solutions also has a target pretax income of 171,000 for 2018. To achieve this target income, they need to produce 2,700,000 in sales. If they achieve the target pretax income for 2018, what is the margin of safety, in percent form?

The reports the contribution margin income statement for 2017 are as follows.

BUSINESS SOLUTIONS
Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (10,500 units at $225 each)	$	2,362,500
Variable costs (10,500 units at $180 each)		1,890,000
Contribution margin	$	472,500
Fixed costs		369,000
Pretax income	$	103,500

Answer 1

Answer 1.

Answer 2.

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $472,500 / $2,362,500
Contribution Margin Ratio = 0.20

Breakeven Point in dollar sales = Fixed Costs / Contribution Margin Ratio
Breakeven Point in dollar sales = $369,000 / 0.20
Breakeven Point in dollar sales = $1,845,000

Margin of Safety in percent = (Sales - Breakeven Point in dollar sales) / Breakeven Point in dollar sales
Margin of Safety in percent = ($2,700,000 - $1,845,000) / $2,700,000
Margin of Safety in percent = 31.7%