Question

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 (8,600 units)		$455,800		$53
Variable costs		223,342		25.97
Contribution margin		232,458		$27.03
Fixed expenses		205,428
Net income		$27,030

Management is considering the following course of action to increase net income: Reduce the selling price by 5%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 20%.

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.

Breakeven point = Fixed cost / Contribution margin

=$205,428/$27.03

=7,600 units

Breakeven point =7,600×$53 =$402,800

Margin of safety = (Actual units- breakeven units) × Selling price

=(8,600-7,600)×$53

=$53,000

B.

Selling price reduced by 5% . New selling price =$53-5% =$50.35

Units increase by 20% , new sales units =8,600+20% =10,320

Breakeven point=$205,428/$24.38 =8,426 units

Breakeven point =8,426×$50.35=$424,249

Margin of safety = (10,320-8,426)×$50.35 =$95,363