Question

Another useful method for figuring out the type of performance your company will need to reach a target income is by using sales revenue. Rather than using the number of units, this method uses total sales revenue. In companies for which the total set of goods produced and sold is more varied, this would be the preferred method, as opposed to a business in which only one product is sold. Assume a company has pricing and cost information as follows:

Price and Cost Information	Amount
Selling Price per Unit	$20
Variable Cost per Unit	$10
Total Fixed Cost	$12,000

For the upcoming period, the company wishes to generate operating income of $75,000. Given the cost and pricing structure for the company’s product, how much sales revenue must it generate to attain its target income?

Step 1: Calculate the contribution margin ratio:

The contribution margin ratio is the contribution margin in proportion to the selling price on a per-unit basis.

Contribution Margin Ratio =	(Selling Price – Variable Cost)
	Selling Price

Note: The contribution margin ratio is calculated to one decimal place.)

Contribution Margin Ratio =	($_______ – $10)	= _________
	$_______

Step 2: Calculate the sales revenue required to attain the target income:

Sales Dollars =	(Target Income + Fixed Cost)
	Contribution Margin Ratio

Sales Dollars =	( $_________ + $12,000)	=	$________
	__________

Step 3: Create a contribution margin income statement, to check your previous work. Enter all amounts as positive numbers.

Sales		$_______
Total variable expense		________
	Total contribution margin	________
Total fixed expense		________
	Operating income	________

APPLY THE CONCEPTS: Margin of Safety
Margin of safety can allow you to see how much padding there is for your company between profit and loss. If this number is great, it may indicate that your company is performing very well. If this number is small, it may be worth looking into possible remediation. Consider the following pricing and cost information:

Price and Cost Information	Amount
Selling Price per Unit	$450
Variable Cost per Unit	$400
Total Fixed Cost	$70,000

For the upcoming period, the company projects that it will sell 2,000 units. Considering that the company has a unit break-even point of 1,400 units, what is the margin of safety in terms of both units and sales revenue? Round your answers to two decimal places, if necessary.

Margin of Safety in Units = _______ - ________ = _______

Margin of Safety in Sales Revenue = $________ - $_________ = $________

Answer 1

• Answer/ Solution to the questions, Conteribution Margin Ratio = Selling Price r.co L S.P. = 20-10 Shop 2 | Ratio 1-50%) Sales Revenue exequiered to attain the target oncome - Sales Dollars Target Incometfixed cost Conteribution Margon Ratio $7500+ $12000 50% Sales Bolleby = $17 yout Step.3 Income statement. 1. Sales $174000 Total variable ( 87000) .8700 units Excps. Total contribution $8 7000 Total fixed Cost ($12000) Operating Income &75000 17400D 20 x 10 - I Break Even Sales units) E margin of safety in 0 - Total Sale (Mos) Onits) Cunits = 2000 - 1400 mos (units) = 60 Units mos (in $) = Total Sales - Break Even Sales lin 5) (in) = (2000x450) - (1400x450) = govoro - 63ovno Imos Cin$) -$2700ud