Outback Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $450,000 $30 Variable Expenses 180,000 12 Contribution Margin 270,000 18 Fixed Expenses 216,000 Net Operating Income 54,000 1. What is the monthly break-even point? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profit of $90,000? Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company’s margin of safety in dollars.

Outback company

A.

Break even point describes the volume of sales that a Business must maintain to cover its total costs. At this point, Profit is zero.

Break Even Point = Fixed Costs divided by contribution per unit

= $216,000 / 18 = 12,000 units

Break Even Point (in sales) = 12,000 x $30 = $360,000

B.

The total contribution at 12,000 unit of sales will equal the Fixed Costs of Production. This is because the only element of expense required to have zero profit after Contribution is the Fixed Costs of production.

Contribution at Break Even Point = Fixed Costs of production. = $216,000

C.

To achieve a target Net Income of $90,000

Having broken even at 12,000 units and covered the entirety of our Fixed Costs, the only consideration for profit from every additional volume sold is the contribution per unit.

That is, $90,000 divided by $18 per unit = 5,000 units.

Therefore adding the Break even volume to this will give us our target volume to achieve $90,000 profit.

= 12,000 + 5,000 = 17,000 units

Contribution format income statement for Outback Company

Revenue = ($30 x 17,000 units) = $510,000

Less Variable costs ($12 x 17,000) $204,000

Contribution = $306,000

Less Fixed Costs = $216,000

Net income = $90,000

D.

Margin of Safety.

This is a measure of how low sales will be allowed to fall before a firm slides into a loss position. Thus the larger the Margin of safety, the better for a firm.

Margin of Safety = ( Sales less Break Even sales ) all divided by sales

= ($450,000 - $360,000) / $450,000

= 0.20 or 20%

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