Question

Problem set Ross Pro’s Sports Equipment began business in 2019, and its sales in 2019 were 4,800 units of sports equipment. The selling price per unit was $300. Variable cost per unit of sports equipment was $186. Annual fixed costs were $446,400.

1. Please use the format of a contribution margin income statement to calculate the contribution margin (in dollars), unit contribution, and contribution margin ratio for Ross Pro’s Sports Equipment.

Part 1
	Total	Per unit	Percentage
Sales (4,800 units)		300
Less: Variable costs		186
Contribution margin
Less: Fixed costs
Net income

2. What will be the break-even point in units and in dollars if we assume that Ross Pro’s Sports Equipment sells one type of sports equipment only?

Part 2
Break-even in units
Break-even in sales

3. How many units must the company sell to earn a pre-tax income of $500,028?

Part 3
Target before-tax income	500,028
Target income volume (units)

4. If the company’s tax rate is 28 percent, how many units of sports equipment must be sold to earn an after-tax profit of $700,200?

Part 4
Target after-tax income	700,200
Target income volume (units)

5. What is the company’s margin of safety based on the sales of 4,800 units of sports equipment?

Part 5
Margin of safety

6. Assume that there is no change in fixed costs. What will be the expected net income if this company has the sales revenue of $2,010,000?

Part 6		Units
Sales	2,010,000
Less: Variable costs
Contribution margin
Less: Fixed costs
Net income

Answer 1

1
Prepare income statement using contribution margin format
	Total	Per unit	%
Sales (4,800*300)	$1,440,000	$300	100%
Less: Variable costs (4800*186)	$892,800	$186	62.00%
Contribution margin	$547,200	$114	38.00%
Less: Fixed costs	$446,400
Net income	$100,800
2
Break-even in units	Fixed costs/Contribution margin per unit
Break-even in units	446400/114
Break-even in units	3916
Break-even in sales	Fixed costs/Contribution margin ratio
Break-even in sales	446400/38%
Break-even in sales	$1,174,737
3
Calculate number of units to be sold
No of units	(Fixed costs + Target income)/Contribution margin per unit
No of units	(446400+500028)/114
No of units	8302
Thus, number of units to be sold is 8302
4
No of units	(Fixed costs + Target income)/Contribution margin per unit
No of units	(446400+(700200/0.72))/114
No of units	12446
5
Margin of safety	Actual sales - Break even sales
Margin of safety	1440000-1174737
Margin of safety	$265,263
6
	Total	Per unit	%
Sales (6,700*300)	$2,010,000	$300	100%
Less: Variable costs (6700*186)	$1,246,200	$186	62.00%
Contribution margin	$763,800	$114	38.00%
Less: Fixed costs	$446,400
Net income	$317,400