Question

Break-Even Units, Contribution Margin Ratio, Margin of Safety

Khumbu Company's projected profit for the coming year is as follows:

	Total			Per Unit
Sales	$3,543,500			$38.00
Total variable cost	1,133,920			12.16
Contribution margin	$ 2,409,580			$ 25.84
Total fixed cost	1,020,528
Operating income	$ 1,389,052

Required:

. Compute the break-even point in units. If required, round your answer to nearest whole value.
units

2. How many units must be sold to earn a profit of $240,000? If required, round your answer to nearest whole value.
units

3. Compute the contribution margin ratio. If required, round your answer to nearest whole number.
%

Using the rounded ratio from above, compute the additional profit that Khumbu would earn if sales were $160,000 more than expected.
$

4. For the projected level of sales, compute the margin of safety in units.
units

Answer 1

1. Break-even point in units = Total fixed cost / Contribution margin per unit = $1,020,528/$25.84 = 39,494 units

2. Required profit = $240,000

Target contribution margin = Required profit + Fixed costs = $240,000 + $1,020,528 = $1,260,528

Units to be sold = Target contribution margin / Contribution margin per unit = $1,260,528/$25.84 = 48,782 units

3. Contribution margin ratio = Contribution margin / Sales = $ 2,409,580/$3,543,500 = 68%

Additional profit = Additional sales * Contribution margin ratio = $160,000 * 68% = $108,800

4. Margin of safety in units = Operating income / Contribution margin per unit = $ 1,389,052 / $25.84 = $53,755 units