Question

Ionic Charge, is a newly organized manufacturing business that plans to manufacture and sell 60,000 units per year of a new product. The following estimates have been made of the company’s costs and expenses (other than income taxes).
Fixed Variable per Unit
Manufacturing costs:
Direct materials $25
Direct labor $15
Manufacturing overhead $500,000 $8
Period costs:
Selling expenses $2
Administrative expenses $300,000
Totals $800,000 $50

Required:

a. What should the company establish as the sales price per unit if it sets a target of earning an operating income of $700,000 by producing and selling 60,000 units during the first year of operations? (Hint: First compute the required contribution margin per unit.)
b. At the unit sales price computed in part a, how many units must the company produce and sell to break even? (Assume all units produced are sold.)
c. What will be the margin of safety (in dollars) if the company produces and sells 60,000 units at the sales price computed in part a?

Answer 1

Answer:

a. What should the company establish as the sales price per unit if it sets a target of earning an operating income of $700,000 by producing and selling 60,000 units during the first year of operations?

• $64.50

b. At the unit sales price computed in part a, how many units must the company produce and sell to break even?

• 55,173 units

c. What will be the margin of safety (in dollars) if the company produces and sells 60,000 units at the sales price computed in part a?

• $311,341.50

Explanation:

variable costs per unit:

direct materials $25

direct labor $15

manufacturing overhead $8

selling expenses $2

total $50

fixed costs per unit:

manufacturing overhead $500,000

administrative expenses $300,000

total $800,000

assuming the company actually produces and sells the 60,000 units

units sold = (fixed costs + expected profits) / contribution margin

60,000 = $870,000 / contribution margin

contribution margin = $870,000 / 60,000 = $14.50

contribution margin = sales price - variable costs

$14.50 = sales price - $50

sales price = $50 + $14.50 = $64.50

break even point = fixed costs / contribution margin = $800,000 / $14.50 = 55,172.41 ≈ 55,173 units

margin of safety = current sales - break even point = (60,000 x $64.50) - (55,173 x $64.50) = $311,341.50