Question

Bedco makes high quality beds. Each bed sells for $1,000. They sold 750 beds in 2020 and 900 beds in 2019. Their costs for both years are presented below:

2019:

Cost of Goods Sold: $360,000

Operating Expenses: $220,000

Factory Rent: $60,000

2020:

Cost of Goods Sold: 300,000

Operating Expenses: 190,000

Factory Rent: 60,000

PART A: USING TARGET PROFIT ANALYSIS, DETERMINE THE BEDCO’S REQUIRED SALES LEVELS (IN TERMS OF BOTH DOLLARS AND UNITS) IF THEY WANT TO ACHIEVE A TARGET PROFIT OF $1,100,000.

PART B: FOR 2020, DETERMINE THE COMPANY’S MARGIN OF SAFETY AND MARGIN OF SAFETY PERCENTAGE.

Answer 1

Variable Cost of Goods Sold = $300000 / 750 = $400 per unit

Operating Expenses
Variable Cost per unit = ($220000 - 190000) / (900 - 750) = $200 per unit
Fixed Cost = $220000 - 900 x 200 = $40000

Contribution Margin per unit = $1000 - 400 - 200 = $400 per unit

Part A
Required Sales Units = (Fixed Costs + Target profit) / Contribution Margin per unit
= ($100000+1100000) / 400 = 3000 units

Sales Dollars = 3000 x $1000 = $3,000,000

Part B
Break Even Sales = $100000 / 400 = 250 units

Margin of Safety = $750000 - 250000 = $500,000

Margin of Safety Percentage = $500000 / 750000 = 66.67%