Question

Current operating income for Bay Area Cycles Co. is $26,000. Selling price per unit is $100, the contribution margin ratio is 25% and fixed expense is $104,000. Required: 1. Calculate Bay Area Cycle's breakeven point in units and total sales dollars. Break-even units Break-even dollars 2. Calculate Bay Area Cycle's margin of safety and margin of safety ratio.

Answer 1

Answer:

Results are below.

Explanation:

First, we need to calculate the unitary contribution margin:

Unitary contribution margin= 100*0.25

Unitary contribution margin= $25

Now, we can calculate the break-even point in units and dollars:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 104,000 / 25

Break-even point in units= 4,160

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 104,000 / 0.25

Break-even point (dollars)= $416,000

Finally, the margin of safety in dollars as a ratio:

Current sales= (26,000 + 104,000) / 25

Current sales= 5,200

Margin of safety= (current sales level - break-even point)

Margin of safety= (5,200*100 - 416,000)

Margin of safety= $104,000

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= 104,000 / 520,000

Margin of safety ratio= 0.2 = 20%