Question

Narchie sells a single product for $40. Variable costs are 80% of the selling price, and the company has fixed costs that amount to $176,000. Current sales total 18,000 units.

1. Narchie:

a. will break-even by selling 15,333 units.

b. will break-even by selling 10,000 units.

c. cannot break-even because it loses money on every unit sold.

d. will break-even by selling 1,002,000 units.

e. will break-even by selling 22,000 units.

2. In order to produce a target profit of $20,000, Narchie's dollar sales must total:

a. $24,500.

b. $925,000.

c. $980,000.

d. an amount other than those above.

e. $11,560.

3. If Narchie sells 24,500 units, its safety margin will be:

a. $100,000.

b. $600,000.

c. $500,000.

d. $200,000.

e. an amount other than those above.

Answer 1

1. Break Even Point = Fixed Cost / Contribution Margin Ratio

= $ 176,000 /( 20%* $ 40)

= 22,000 Units

Hence the correct answer is e. will break-even by selling 22,000 units

2. target profit  required = $ 20,000

Add: Fixed Cost = $ 176,000

Contribution Margin Required = $ 196,000

Contribution Margin Per Unit = 20%

Hence, the  dollar sales for target profit = Contribution Margin Required / Contribution Margin Per Unit

= $ 196,000 / 0.2

= $ 980,000

Hence the correct answer is c. $980,000

3.

Break Even Point = Fixed Cost / Contribution Margin Ratio

= $ 176,000 /( 20%* $ 40)

= 22,000 Units

safety margin = Actual - Break Even Sales

= 24,500 - 22,000

= 2,500 Units

safety margin ($) = 2,500 Units * 40

= $ 100,000

Hence the correct answer is a. $100,000.