Question

Last month, Laredo Company sold 600 units for $80 each. During the month, fixed costs were $3,570 and variable costs were $12 per unit. Required: 1. Determine the unit contribution margin and contribution margin ratio. 2. Calculate the break-even point in units and sales dollars. 3. Compute Laredo's margin of safety in units and as a percentage of sales.

Answer 1

Selling price per unit = $80

Variable cost per unit = $12

Fixed costs = $3,570

Number of units sold = 600

1.

Contribution margin per unit = Selling price per unit – Variable cost per unit

= 80 - 12

= $68

Contribution margin ratio = Contribution margin per unit/Selling price per unit

= 12/80

= 15%

2.

Break even point (units) = Fixed cost/Contribution margin per unit

= 3,570/68

= 53 units

Break even sales in dollars = Fixed cost/Contribution margin ratio

= 3,570/15%

= $23,800

3.

Margin of safety in units = Present sales - Break even sales

= 600 - 53

= 547

Margin of safety (%) = Margin of safety/Present sales

= 547/600

= 91.1667%

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