Question

Cost-Volume-Profit, Margin of Safety

Victoria Company produces a single product. Last year’s income statement is as follows:

Victoria Company

Contribution Margin Income Statement

For the Last Year

1	Sales (29,000 units)	$1,218,000.00
2	Variable cost	812,000.00
3	Total contribution margin	$406,000.00
4	Fixed cost	300,000.00
5	Operating income	$106,000.00

	Required:
1.	Compute the break-even point in units and sales dollars calculated using the break-even units.
2.	What was the margin of safety for Victoria last year in sales dollars?
3.	Suppose that Victoria is considering an investment in new technology that will increase fixed cost by $250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?

Answer 1