Question

Cottonwood Company reports the following operating results for the month of April.

COTTONWOOD COMPANY CVP Income Statement For the Month Ended April 30, 2020
		Total		Per Unit
Sales (8,500 units)		$382,500		$45
Variable costs		153,000		18
Contribution margin		229,500		$27
Fixed costs		178,200
Operating income		$51,300

Management is considering the following course of action to increase operating income: Reduce the selling price by 20%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 30%.

Using the contribution margin technique, calculate the break-even point in units and dollars and margin of safety in dollars, assuming changes to sales price and volume as described above.

Answer 1

Solution:

New selling price per unit = $45 *80% = $36

New contribution margin per unit = $36 - $18 = $18 per unit

CM ratio = $18/$36 = 50%

Fixed costs = $178,200

Break-even point in units = Fixed costs / CM per unit = $178,200 / $18 =9900 units

Break-even point in dollars = Fixed costs / CM ratio = $178,200 / 50% = $356,400

New sales volume = 8500*130% = 11050 units

New sales revenue = 11050*$36 = $397,800

Margin of safety in dollars = Current sales - Breakeven sales

= $397,800 - $356,400 = $41,400