Question

Break-Even Units, Contribution Margin Ratio, Margin of Safety

Khumbu Company's projected profit for the coming year is as follows:

Total |
Per Unit |
|||

Sales | $3,331,250 | $41.00 | ||

Total variable cost | 999,375 | 12.30 | ||

Contribution margin | $ 2,331,875 | $ 28.7 | ||

Total fixed cost | 1,009,369 | |||

Operating income | $ 1,322,506 |

**Required:**

**1.** Compute the break-even point in units. If
required, round your answer to nearest whole value.

units

**2.** How many units must be sold to earn a profit
of $240,000? If required, round your answer to nearest whole
value.

units

**3.** Compute the contribution margin ratio. If
required, round your answer to nearest whole number.

%

Using the rounded ratio from above, compute the additional
profit that Khumbu would earn if sales were $160,000 more than
expected.

$

**4.** For the projected level of sales, compute
the margin of safety in units.

units

Answer #1

1.

Break-even point in units = Fixed cost / Contribution margin per unit

= $1,009,369 / $28.7

= 35,170 units

2.

Units to be sold = (Fixed cost + Desired profit) / Contribution margin per unit

= ($1,009,369 + $240,000) / $28.7

= 43,532

3.

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $28.7 / $41.00

= 0.7

Additional profit = $160,000 * 0.7

= $112,000

4.

Sales in units = $3,331,250 / $41

= 81,250

Margin of safety in units = Sales in units - Break-even sales in units

= 81,250 - 35,170

= 46,080

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