Question

part 1

Candle Co. has sales of $200,000 this month, contribution margin of $100,000, monthly fixed cost of $80,000 and profit of $20,000. What is the firm’s current breakeven volume in dollars? (rounded)

Select one:

a. All listed choices are incorrect.

b. $160,000.

c. $180,000.

d. $140,000.

part 2

Candle Co. has sales of $200,000 this month, contribution margin of $100,000, monthly fixed cost of $80,000 and profit of $20,000. What is the firm’s current breakeven ratio to sales? (rounded)

Select one:

a. All listed choices are incorrect.

b. 0.80.

c. 0.70.

d. 0.60.

part 3

Candle Co. has sales of $200,000 this month, contribution margin of $100,000, monthly fixed cost of $80,000 and profit of $20,000.What is the firm’s current operating leverage number? (rounded)

Select one:

a. 5.00.

b. All listed choices are incorrect.

c. 0.20.

d. 0.40.

part 4

Candle Co. has sales of $200,000 this month, contribution margin of $100,000, monthly fixed cost of $80,000 and profit of $20,000. What is the firm’s current margin of safety ratio to sales [ie., safety margin ratio]? (rounded)

Select one:

a. 0.20.

b. All listed choices are incorrect.

c. 0.25.

d. 0.40.

Answer 1

Part 1

Contribution margin ratio = Contribution margin / Sales * 100

= $100,000 / $200,000 * 100

= 50%

Break-even volume in dollars = Fixed cost / Contribution margin ratio

= $80,000 / 50%

= $160,000

The answer is Option b.

Part 2

Contribution margin ratio = Contribution margin / Sales * 100

= $100,000 / $200,000 * 100

= 50%

Break-even volume in dollars = Fixed cost / Contribution margin ratio

= $80,000 / 50%

= $160,000

Break-even ratio to sales = Break-even volume in dollars / Sales

= $160,000 / $200,000

= 0.8

The answer is Option b.

Part 3

Operating leverage = Contribution margin / Profit

= $100,000 / $20,000

= 5

The answer is Option a.

Part 4

Margin of safety ratio to sales = (Sales - Break even sales) / Sales

= ($200,000 - $160,000) / $200,000

= 0.2

The answer is Option a.