Question

Question No. 2 (Marks 10)

MURDER TO GO! Writes and manufactures murder mystery parlor games which it sells to retail stores. Shown below is per-unit information relating to the manufacture and sale of this product.

Unit sales price                                                                                                           $28

Variable cost per unit                                                                                                  $7

Fixed costs per year                                                                                                    $240,000

Required:

Determine the following, showing as part of your answer the formula which you used in your computation.

1. Contribution margin ratio
2. Sales volume (in dollars) required to break even
3. Sales volume (in dollars) required to earn an annual operating income of $ 450,000
4. The margin of safety sales volume if annual sales total $40,000 units
5. Operating income if annual sales total 40,000 units

Answer 1

a)

contribution margin ratio=(unit sales price-variable cost per unit)/unit sales price.

=($28-$7)/$28

=$21/$28

=0.75 *100

=75%

b)sales volume required for breakeven(dollars)=fixed cost/contribution margin ratio

=$240,000/75%

=$320,000

c)sales volume (dollars)=(fixed cost+target operating income)/contribution margin ratio

=($240,000+$450,000)/75%

=$690,000/0.75

=$920,000

d)margin of safety sales volume=budgeted annual sales-break even sales

=40000units-11429 units

=28571 units

break even sales volume (units)=fixed cost/(unit sales price-unit variable cost)

=$240,000/($28-$7)

=$240,000/$21

=11429 units

e)operating income=(unit sales * unit sales price)-(unit sales *unit variable cost)-fixed cost

=(40000*28)-(40000*7)-240000

=1120000-280000-240000

$600,000