Question

Current operating income for Bay Area Cycles Co. is $24,000. Selling price per unit is $100,...

Current operating income for Bay Area Cycles Co. is $24,000. Selling price per unit is $100, the contribution margin ratio is 30%, and fixed expense is $96,000.

Required:

1. Calculate Bay Area Cycle’s break-even point in units and total sales dollars.

2. Calculate Bay Area Cycle’s margin of safety and margin of safety ratio.

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Homework Answers

Answer #1

contribution margin=Sales price-Variable cost

contribution margin ratio=contribution margin/Sales price

1.contribution margin=(0.3*100)=$30

Hence breakeven point=Fixed cost/contribution margin

=(96000/30)=3200 units

=(3200*100)=$320,000

2.

Contribution margin-Fixed cost=Current net operating income

Hence current contribution margin=(24000+96000)=$120,000

Hence current total sales=(120,000/0.3)=$400,000
Hence margin of safety =Total sales-Breakeven sales

=(400,000-320,000)=$80,000

=(80000/100)=800 units

margin of safety ratio=margin of safety /Total sales

=(80,000/400,000)=20%

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