Question

Problems 1.) The following information describes a product to be produced and sold by Motley Company (6 pts): Selling price .......... Variable costs ............ Total fixed costs ......... ..$60 per unit ............ $22 per unit $630,000 a.) What dollar amount of sales would be necessary to achieve a profit of $150,000? b.) How many units would be necessary to achieve the $150,000 profit? c.) Using the $150,000 profit, what is the margin of safety?

Answer 1

Contribution Margin per unit=Selling price per unit - Variable cost per unit = $60 - $22 = $38 a. Number of units to be sold achieve a profit of $150,000 Formula Number of units to be sold achieve a target profit = Fixed costs + Target profit Contribution margin per unit Fixed costs +$150,000 Number of units to be sold to achieve a profit of $150,000 = margin per unit $630,000 +$150,000 $38 = 20,526 units rounded to 0 decimal places b. Dollar amount of sales to be made to achieve a profit of $150,000 Dollar amount of sales to be made to achieve a profit of $150,000 = No. of units to be sold to achieve a profit of $150,000 x Selling price per unit = 20,526 units x $60 = $1,231,560

c. Margin of Safety Fixed costs Break-even point (in units) = Contribution margin per unit $630,000 = 16,579 $38 rounded to 0 decimal places Break-even point (in dollars) = Break-even point (in units) 1 Selling price per unit - 16,579 units x $60 = $994,740 Margin of Safety (In units), when the profit is $150,000 = Total sales (in units) - Break-even sales (in units) = 20,526 units – 16,579 units = 3,947 units Margin of Safety (In dollars), when the profit is $150,000 = Total sales (in dollars) - Break-even sales (in dollars) = $1,231,560 - $994,740 = $236,820