Question

Our team is hired by Apple to help assess whether or not to continue to manufacture and sell an older model of the iPhone. Apple explains that this model continues to sell well in foreign markets but it worries that fixed costs are so large that it is difficult to earn a profit. The Tableau Dashboard is provided to aid our analysis of this model.

TOTAL FIXED COSTS:

factory expense = $10,250,000

production manager salaries = $8,500,000

insurance expense = $6,000,000

equipment (straight-line) depreciation expense = $5,350,000

advertising expense = $5,000,000

VARIABLE COSTS PER UNIT:

battery = $10

camera = $45

internal components = $90

receiver = $35

screen = $95

speaker = $25

SALES PRICE PER UNIT:

iphone sales price per unit $750

Answer the requirements for each of the following separate situations.
1. If Apple expects sales of 100,000 units, compute its margin of safety (a) in dollars and (b) as a percent of expected sales.

Print References Required 1 Required 2A Required 2B Required 3A Required 3B If Apple expects sales of 100,000 units, compute its margin of safety (a) in dollars and (b) as a percent of expected sales. Margin of Safety (a) Dollars (b) Percent 22% < Required 1 Required 2A >

Answer 1

Total fixed costs = Factory expense + Production manager salaries + Insurance expense + Equipment depreciation expense + Advertising expense

= $10,250,000 + $8,500,000 + $6,000,000 + $5,350,000 + $5,000,000

= $35,100,000

Variable cost per unit = Battery + Camera + Internal components + Receiver + Screen + Speaker

= $10 + $45 + $90 + $35 + $95 + $25

= $300

Contribution margin per unit = Selling price per unit - Variable costs per unit

= $750 - $300

= $450

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

= $450 / $750

= 0.6

Break-even sales dollars = Fixed costs / Contribution margin ratio

= $35,100,000 / 0.6

= $58,500,000

1 (a) Margin of safety in dollars = Sales - Break-even sales

= (100,000 * $750) - $58,500,000

= $16,500,000

(b) Margin of safety as s percent of expected sales = Margin of safety in dollars / Sales

= $16,500,000 / (100,000 * $750)

= 0.22