Question

Exercise 6.29 b-c

Embleton Company estimates that variable costs will be 80% of sales, and fixed costs will total $384,000. The selling price of the product is $6.   

Calculate the break-even point in units and dollars.

Break-even point			units
Break-even point		$

Assuming actual sales are $2,560,000, calculate the margin of safety in dollars and as a ratio.

Margin of safety		$
Margin of safety ratio			%

Answer 1

Contribution margin ratio = 1 - Variable cost ratio

= 1 - 0.8

= 0.2

Contribution margin per unit = Selling price per unit * Contribution margin ratio

= $6 * 0.2

= $1.2

Break-even point in units = Fixed costs / Contribution margin per unit

= $384,000 / $1.2

= 320,000

Break-even point in dollars = Fixed costs / Contribution margin ratio

= $384,000 / 0.2

= $1,920,000

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Margin of safety dollars = Sales - Break even sales

= $2,560,000 - $1,920,000

= $640,000

Margin of safety ratio = Margin of safety / Sales * 100

= $640,000 / $2,560,000 * 100

= 25%