Question

Please answer a3

The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company’s profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them.

Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 738,000 units at an average selling price of $4.20 per unit. The variable costs were $1,859,760, and the fixed costs were $867,888.

a1 Computation of Contribution Margin Ratio:

Contribution per unit = Selling price per unit - Variable expense per unit

Variable Cost per unit = $1,859,760 / 738,000 units = $2.52 per unit

Therefore, Contribution per unit = $4.20 - $2.52 = $1.68 per unit

Contribution Margin Ratio = Contribution per unit / Selling price per unit * 100

Contribution Margin Ratio =  $1.68 / $4.20 *100 = 40%

a2 Computation of company’s break-even point in units and in dollars for this product:

Break Even Units = Fixed Cost/Average Contribution Margin per unit

Break Even Units = $867,888/$1.68 = 516,600 units

Computation of Breakeven in dollars:

Breakeven in dollars = Break Even Units * Selling price per unit

Breakeven in dollars = 516,600 * $4.20 = $2,169,720

What is the margin of safety, both in dollars and as a ratio? (Round ratio to 0 decimal places, e.g. 25%.)

Margin of safety in dollars		$
Margin of safety ratio			%

Answer 1

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