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