Question

The Frosty Corporation manufactures and sells snow rakes. The rakes sell for $20 each.

Information about the company’s costs is as follows:

Variable manufacturing cost per unit- $6

Variable selling and administrative cost per unit- $2

Fixed manufacturing overhead per month- $300,000

Fixed selling and administrative cost per month- $600,000

1.Determine the company’s monthly breakeven point in units

2. Determine the sales volume (in dollars) required for a monthly operating income of $1,200,000.

3. Compute the company’s margin of safety if its current monthly sales level is $2,500,000

Answer 1

1) Contribution Margin per unit = Selling Price per unit - Total Variable cost per unit

= $20 - ($6+$2) = $12 per unit

Break Even Point in units = Total Fixed Cost per month/Contribution Margin per unit

= ($300,000+$600,000)/$12 per unit = 75,000 units

2) Contribution Margin Required = Total Fixed Costs+Operating Income

= $900,000+$1,200,000 = $2,100,000

Units required to be sold (in units) = Contribution Margin required/Contribution margin per unit

= $2,100,000/$12 per unit = 175,000 units

Sales required (in dollars) = Units sold*Selling price per unit

= 175,000 units*$20 per unit = $3,500,000

3) Margin of Safety = Current Sales Value - Break Even Sales in Dollars

= $2,500,000 - (75,000 units*$20 per unit)

= $2,500,000 - $1,500,000 = $1,000,000