Question

Crane Company estimates that variable costs will be 55.00% of sales, and fixed costs will total $702,000. The selling price of the product is $4. (a) Compute the break-even point in (1) units and (2) dollars. (1) Break-even sales units (2) Break-even sales $ (c) Assuming actual sales are $2,000,000, compute the margin of safety in (1) dollars and (2) as a ratio. (1) Margin of safety $ (2) Margin of safety ratio %

Answer 1

Answer and Explanation:

The computation is shown below;

The Variable cost is

= 55% of $4

=$2.2

Now

Contribution margin per unit

= Sale - Variable cost

= $4  - $2.2

= $1.8 per unit

a.Breakeven point is

= Fixed cost ÷ Contribution margin

In units

= ($702,000 ÷ $1.8)

= 390,000 units

in dollars = (390,000 × $4)

= $1,560,000

b.Margin of safety = Total sales - Breakeven sales

In dollars  = ($2,000,000 - $1,560,000)

= $440,000

Margin of safety ratio  =Margin of safety ÷ Total sales

= ($440,000 ÷ $2,000,000)

= 22%