Question

Bob Friend sells wristwatches with pictures of celebrities on them. Each watch sells for $25. Bob estimates his variable costs to be $15 per watch and fixed costs to be $44,000. From the data given, calculate:a) number of watches sold at the break even pointb) the break even point in sales dollarsc) contribution margin ratio) the number of watches needed to be sold to earn a net income of $22,000e) the margin of safety in dollars if Bob sells 5,000 watchesf) the degree of operating leverage if Bob sells 5,500 watches (make an income statement first)g) the break even point in units if variable costs increase by $1 per unit and fixed costs increase by $7,200.

Answer 1

Contribution Margin per Unit => Sale - Variable Cost => $25 - 15 = $10. Contribution Margin Ratio =>($10/25)*100 = 40%.

a) Break even Point Units => Fixed cost/ Contribution Margin per Unit => $44,000/10 = 4,400 watches.

b)Breakeven Dollars => Fixed Cost/CM ratio => $44,000/40% = $110,000.

C)Contribution Margin ratio => 40%

d) Units =>( Fixed cost+ Net Income)/Contribution Margin per unit => ($44,000 + 22,000)/10 =>6,600 watches.

e)Margin of Safety Dollars => (Actual Sales - Breakeven sales) * sales per watch =>(5,000 - 4,400) * $25 => $15,000.

f)Degree of Operating leverage => Contribution Margin/Operating Income => (5,500*$10)/$11,000 = 5.0

g)Breakeven Point => Fixed cost/Contribution Margin per unit =>( $44,000 + $7200)/(25-16) =>5,688 units.

If you have any doubts please comment on the answer.