Answer:
Victoria Company
1. No Changes:
Break-even point in units = 7,398
Break-even point in dollars = $369,900
Margin of safety = $80,100
2. With changes in sales price and costs:
Break-even point in units = Fixed expense/Contribution margin per unit
= 8,220
Break-even point in dollars = Fixed expense/Contribution ratio
= $390,437
Margin of safety in dollars
= $122,563
Explanation:
a) Data and Calculations:
VICTORIA COMPANY
CVP Income Statement
For the Month Ended April 30, 2020
Total Per Unit
Sales (9,000 units) $450,000 $50
Variable costs 225,000 25.00
Contribution margin 225,000 $25.00
Fixed expenses 184,950
Net income $40,050
Break-even point in units = $184,950/$25 = 7,398
Break-even point in dollars = $184,950/0.5 = $369,900
Margin of safety = $450,000 - $369,900 = $80,100
Management's decision to reduce selling price by 5%
New selling price = $47.50 ($50 * 95%)
Unit sales = 10,800 (9,000 * 1.2)
Total Per Unit
Sales (10,800 units) $513,000 $47.50
Variable costs 270,000 25.00
Contribution margin 243,000 $22.50
Fixed expenses 184,950
Net income $58,050
Break-even point in units = Fixed expense/Contribution margin per unit
= $184,950/$22.50
= 8,220
Contribution ratio = $22.50/$47.50 = 0.4737
Break-even point in dollars = Fixed expense/Contribution ratio
= $184,950/0.4737
= $390,437
Margin of safety in dollars = Budgeted Sales - Break-even Sales
= $513,000 - $390,437
= $122,563
