Question

uppose McKnight ​Corp.'s breakeven point is revenues of $ 1 comma 100 comma 000. Fixed costs are $ 660 comma 000. Requirements 1. Compute the contribution margin percentage. 2. Compute the selling price if variable costs are ​$16 per unit. 3. Suppose 65 comma 000 units are sold. Compute the margin of safety in units and dollars. 4. What does this tell you about the risk of McKnight making a​ loss? What are the most likely reasons for this risk to​ increase?

Answer 1

Answer:

1. Compute the contribution margin percentage.

• 40%

2. Compute the selling price if variable costs are ​$16 per unit.

• $26.67

3. Suppose 65 comma 000 units are sold. Compute the margin of safety in units and dollars.

• margin of safety in $ = $633,550
• margin of safety in % = 36.55%

4. What does this tell you about the risk of McKnight making a​ loss? What are the most likely reasons for this risk to​ increase?

• Since the contribution margin is relatively high, this means that the production costs are relatively low (compared to selling price). The associated risks may come from high leverage, e.g. machinery purchased on credit that results in high interest expense. For the most part, having a high contribution margin is generally very good, just ask Apple.

Explanation:

break even point is $ = $1,100,000 (= break even point units x selling price)

fixed costs = $660,000

contribution margin % = (total sales - total variable costs) / total sales

total variable costs = $1,100,000 - $660,000 = $440,000

contribution margin % =  ($1,100,000 - $660,000) / $1,100,000 = 40%

variable costs = $16 per unit

0.4 = (x - $16) / x

0.4x = x - $16

$16 = 0.6x

x = $26.67

65,000 x $26.67 = $1,733,550

margin of safety in $ = $1,733,550 - $1,100,000 = $633,550

margin of safety in % = $633,550 / $1,733,550 = 36.55%