Question

Selling price per unit			$               120
Current annual sales			$        240,000
Annual fixed costs
	Factory rent		$          43,400
	Depreciation expense - equipment		$          12,000
	Utilities		$          22,000
	Insurance		$            8,400
				$     85,800
Variable costs
	Direct materials		$                 36	per unit
	Direct labour		$                 48	per unit
Income tax rate			20%

If Bridgeport would like to earn a profit after tax of $13,000, what should the sales be?

At this sales level, what is the degree of operating leverage?

What is the margin of safety in unit?

Answer 1

	$
Selling price per unit	120
Less: Variable cost
Direct material	36
Direct labor	48
Contribution margin per unit	36
a. Profit after tax = $ 13000
Rate of tax is 20%
Profit before tax = $ 13000 * 100 / 80 = $ 16250
Proft before tax + fixed cost = Total Contribution margin
$ 16250 + $ 85800 = $ 102050
No. of units to be sold = Total contribution margin / contribution margin per unit
No. of units to be sold = $ 102050 / $ 36 = 2835 units
Sales (in $ ) = 2835 units * $ 120 = $ 340200
Operating leverage =	Quantity x (sale price per unit - variable cost per unit)
	Quantity x (sale price per unit - variable cost per unit) - fixed operating cost
Operating leverage =	2835 X (120 - 36)			=	238140	=	1.56
	2835 X (120 - 36) - 85800				152340
Breakeven sale (in units) = Fixed cost / contribution margin per unit = $ 85800 / $ 36 = 2383 units
Margin of safety (in units) = Projected sale - breakeven sale
Margin of safety (in units) = 2835 - 2383 = 452 units