Question

XMobile Company sells car batteries to service stations for an average of $85 each. The variable cost of each battery is $48 and monthly fixed selling costs total $6,000. Other monthly fixed costs of the company total $7,000.

Required:

a. What is the breakeven point in batteries?

b. What is the margin of safety, assuming sales total $32,000?

c. What is the breakeven level in batteries, assuming variable costs increase by 20%?

d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed selling costs decline by 10%, and other fixed costs decline by $1,000?

Answer 1

1) Breakeven = Fixed cost/ contribution margin

Contribution margin = Selling price - Variable cost

= 85 - 48

= $37

Breakeven

= 13,000/37

= 351.35 batteries

2) Margin of safety = Total sales - Breakeven sales

Breakeven sales = Fixed cost/ Contribution margin ratio

Contribution margin ratio = 37/85 = 43.53%

= 13,000/43.53%

= $29,864

Margin of safety sales

= 32,000 - 29,864

= $2,136

3)

Revised variable cost = 48 + 20%*48 = $57.60

Revised contribution margin = 85 - 57.60 = $27.40

Breakeven = 13,000/27.40

= 474.45 units.

4)

Revised selling price = 85 + 10%*85 = $93.50

Revised fixed selling cost = 6,000 - 10%*6,000 = $5,400

Revised other fixed cost = 7,000 - 1,000 = $6,000

Revised total fixed cost = 11,400

Revised contribution margin = 93.50 - 48 = $45.50

Breakeven

= 11,400/45.50

= 250.55 batteries.

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