Miller Metal Co. makes a single product that sells for $32 per unit. Variable co
ID: 1095462 • Letter: M
Question
Miller Metal Co. makes a single product that sells for $32 per unit. Variable costs are $20.80 per unit, and fixed costs total $47,600 per month.
A. Calculate the number of units that must be sold each month for the firm to break even.
B. Assume current sales are $160,000. Calulate the margin of safety and the margin of safety ration.
1. Margin of Safety
2. Margin of Safety Ratio (%)
C. Calculate operating income if 5,000 units are sold in a month.
D. Calculate operating income if the selling price is raised to $33 per unit, advertising expenditures are increased by $7,000 per month, and monthly unit sales volume becomes 5,400 units.
E. Assume that the firm adds another product to its product line and that the new product sells for $20 per unit, has variable costs of $14 per unit, and causes fixed expenses in total to increase to $63,000 per month. Calculate the firm's operating income if 5,000 units of the original product and 4,000 units of the new product are sold each month. For the original product, use the selling price and variable cost data given in the problem statement.
Explanation / Answer
A. To calculate profit: profit per unit = unit price - unit variable cost
=$32-$20.80=$11.2
break-even analysis: # units to break even = fixed costs / profit per unit
= $47,600/$11.2=4250 units
B.Margin of Safety = Actual Sales - Breakeven Sales
= $160,000 - (4,250 * $32)
= $160,000 - $136,000
= $24,000
Margin of Safety Ratio = $24,000 / $160,000 = 15%
C.Operating income = Total Sales - total variable costs - fixed costs
= (5,000 * $32) - (5,000 * $20.80) - $47,600
= $160,000 - $104,000 - $47,600
= $8,400
E.Assume that the firm adds another product to its product line and that the new product sells for $20/unit, has a variable cost of $14/unit, and causes fixed expenditures in total to increase to $63,000/month
operating income:((5000*32)+(4000*20))-((5000*20.8)+(4000*14)+63000)=$17000
To Calculate the firm's operating income if 4,000 units of the orginal product and 5,000 units of the new product are sold each month
operating income:((4000*32)+(5000*20))-((4000*20.8)+(5000*14)+63000)=$11800