Break-Even in Units and Sales Dollars, Margin of Safety Drake Company produces a
ID: 2584418 • Letter: B
Question
Break-Even in Units and Sales Dollars, Margin of Safety Drake Company produces a single product. Last year's income statement is as follows:
Sales (20,000 units) $1218000
Less: Variable costs 812000
Contribution margin $40600
Less: Fixed costs 300000
Operating income $106000
1. Compute the break-even point in units and sales revenue.
2. What was the margin of safety in dollars for Drake Company last year?
3. Suppose that Drake Company is considering an investment in new technology that will increase fixed costs by $250,200 per year, but will lower variable costs to 45 percent of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming Drake makes this investment.
Explanation / Answer
Answer:-
1)-Break even points (units) = Fixed cost/ Contribution margin per unit
=$300000/$20.30 per unit =14778 units
Explanation:-Contribution margin per unit =Contribution margin/Sales units
=$406000/20000 units =$20.30 per unit
Break even points in sales revenue = Fixed cost/Contribution margin ratio
=$300000/33.33% =$900000
Explanation:- Contribution margin ratio =Contribution/Sales*100
=$406000/$1218000*100 =33.33%
2)- Margin of safety = Operating income/ Contribution margin ratio
=$106000/33.33% =$318000
Total sales in $ = Break even point sales+Margin of safety sales
$1218000 = $900000+$318000
3)-
Explanation:- If the Drake company is making an investment in new technology the net opreating income will increase by $13700 ($119700-$106000). Hence investment in technology is looks worthy for Drake company.
Drake Company Budgeted Income Statement Particluars Amount $ Sales 20000 units*$60.90 per unit 1218000 Less:- Variable costs $1218000*45% 548100 Contribution 669900 Less:- Fixed costs $300000+$250200 550200 Net Opreating Income 119700