Question

Davies shows the following information for the next year for its single product, ceramic pots.

Selling price: $25 per unit

Variable cost: $15 per unit

Fixed cost = $35,000

Requirement 1: Compute the break-even point in units and sale dollars. Show your computations (6 points)

Requirement 2: What amount of sales revenue would Davies need to realize next year in order to generate a net income of $40,000 after tax (assume a tax rate of 20%). Show your computations (10 points)

Requirement 3: Using the sales revenue computed in #2, compute the margin of safety in sales dollars. (4 points)

Answer 1

Answers:

Contribution = $25-$15 = $10

Contribution margin ratio = [$10/$25]*100 = 40%

Requirement 1:

BEP(in units) = Fixed costs/c.p.u = $35,000/$10 = $3,500

BEP(in $) = $35000/40% = $87,500

Requirement 2:

Net income after tax = $40,000 = 80%

Net income before tax = ($40,000*100)/80% = $50,000

Sales required = [$35000+$50000]/40% = $2,12,500

Therefore sales required to arrive net income of $40000 after tax is $2,12,500

Requirement 3:

Margin of safety = Sales in Req. 2 - Bep sales = $2,12,500 - $87,500 = $1,25,000

Thanks....