Bono Manufacturing makes a product that currently sells for $20 each. The variab

Question

Bono Manufacturing makes a product that currently sells for $20 each. The variable costs to make this product are $12 per unit. Fixed costs total are $800,000 per year.

A. How many units must be sold to break even?

B. What will be the company's sales revenue ($) at the break-even point?

C. Assume that the company's current sales are $2.6 million (130,000 units) per year. Calculate the company's margin of safety:

i. in dollars

ii. in units

iii. as a percentage

D. Assume that one of Bono's major competitors has a margin of safety of 35%. Which company is more recession proof: Bono or its competitor? Why?

Explanation / Answer

A. Number of units must be sold to break even = Fixed cost/( price- variable cost)= 800000/(20-12) = 100,000 units

B. Sales Revenue = 100,000*($20) = $2,000,000

C. i) in dollars = ($2.6- $2) millions= $0.6millions

ii) in units = 130,000 - 100,000 = 20,000 units

iii) as percentage = (0.6/2.6)*100 % = 23%

D. Competitor is more recession proof, beacuse even if their sales drop by larger factor they may be breaking even the fixed costs

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