Question

A company has a margin of safety of 25%, a contribution margin ratio of 30%, and sales of $1,000,000. Required: a. What is the break-even point in sales dollars? $ b. What is the operating income? $ c. If neither the relationship between variable costs and sales nor the amount of fixed costs is expected to change in the next year, how much additional operating income can be earned by increasing sales by $110,000?

Answer 1

Answer:

a. $750,000

b. $75,000

c. $33,000

Explanation:

We know that,

a. Margin of safety = Expected sales - break even sales

$1,000,000 × 25% = $1,000,000 - break even sales

$250,000 = $1,000,000 - break even sales

So, the break even sales = $750,000

b. Operating income = Contribution margin - fixed cost

where,

Contribution margin = $1,000,000 × 30% = $300,000

And, the fixed cost = $750,000 - $750,000 × 70%

= $750,000 - $525,000

= $225,000

Or we can do one thing also

Break even point = Fixed cost ÷ contribution margin ratio

$750,000 = Fixed cost ÷ 30%

So, the fixed cost is $225,000

Now put these values to the above formula  

So, the value would equal to

=  $300,000 - $225,000

= $75,000

c. Additional operating income would be

= $110,000 × 30%

= $33,000