Question

In 2018, LTW had breakeven sales of $90,000 and contribution margin of 30%.

1. If sales in 2018 were $110,000, what was the margin of safety?

2. If fixed costs in 2019 are reduced by $2,000 with the contribution margin increased to 35% and total sales increased by 5%, what is net income in 2019?

Answer 1

Here the Breakeven Sales are $90,000 and the contribution margin is 30%

Therefore fixed cost = Breakeven Sales * contribution margin

                                 = $90,000 * 30%

   Fixed Cost = $27,000

1. Computation of Margin of safety

           Given sales are $110,000

           Margin of safety (%) = (Current Sales - Breakeven Sales) / Current Sales * 100

                                      = ( $110,000 - $90,000) / $110,000 * 100

                                      = $20,000 / $110,000 * 100

                                      = 18.18%

                                       OR

        Margin of safety (Sales) = Current Sales - Breakeven Sales

                                                  = $110,000 - $90,000

                                                  = $ 20,000

2. Computation of Net Income in 2019

      Given sales are increased by 5% = $110,000 * 105%

                              Sales in 2019 = $115,500

                  Fixed cost are reduced by $2,000 = $27,000 - $2,000

                                          Fixed cost in 2019 = $25,000

                Contribution Margin is increased to 35%

                             Contribution Margin (%)      = (Sales - Variable Expense) / Sales * 100

35% = ($115,500 - Variable Expense) / $115,500 * 100

   0.35 = ($115,500 - Variable Expense ) / $115,500

                                            0.35* $115,500 = $115,500 - Variable Expense

                           Variable Expense in 2019   = $115,500 - $40,425

                                                                      = $75,075

Computation of Net Income

                                 Sales                           $115,500

                                Less: Variable Expense        $75,075

                                 Contribution Margin             $40,425

                                 Less: Fixed Cost                  $25,000

                                            Net Income               $15,425   

        Therefore Net Income in 2019 $15,425.