Question

Do It! Review 19-1

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Victoria Company reports the following operating results for the month of April.

VICTORIA COMPANY CVP Income Statement For the Month Ended April 30, 2017
		Total		Per Unit
Sales (9,500 units)		$437,000		$46
Variable costs		218,500		23.00
Contribution margin		218,500		$23.00
Fixed expenses		179,400
Net income		$39,100

Management is considering the following course of action to increase net income: Reduce the selling price by 10%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 10%.

Using the contribution margin technique, compute the break-even point in units and dollars and margin of safety in dollars: (Round intermediate calculations to 4 decimal places e.g. 0.2522 and final answer to 0 decimal places, e.g. 2,510.)

(a) Assuming no changes to selling price or costs.

Break-even point			units
Break-even point		$
Margin of safety		$

(b1) Assuming changes to sales price and volume as described above.

Break-even point			units
Break-even point		$
Margin of safety		$

Answer 1

a) break even point in units=fixed costs/contribution per unit=$179400/$23=7800 units

break even point in dollar=fixed costs/pv ratio=$179400/50%=$358800(pv ratio=contribution/sale=23/46=50%)

margin of safety=actual sale-break even sale=$437000-$358800=$78200.

b) break even point in units=fixed costs/contribution per unit=$179400/$18=9967 units.

break even point in dollar=fixed costs/pv ratio=$179400/43.93%=$408377

margin of safety=actual sale-break even sale=$428450-$408377=$20073

note:

in this case,selling price per unit=46-10%=41,sales volume=9500+10%=10450 units

new sales revenue=10450 units x $41=$428450