Breakeven Target Profit Margin of Safety Operating Leverage

Breakeven, Target Profit, Margin of Safety, Operating Leverage

Pike Street Taffy makes and sells taffy in a variety of flavours in a shop located in the local public market. Data for a recent week are as follows:

Revenue (2,000 kgs @ $4.80 per kg)

$9,600

Cost of ingredients

$3,200

Rent

800

Wages

4,800

8,800

Pretax income

800

Taxes (20%)

160

After-tax income

$ 640

All employees work standard shifts, no matter how much taffy is produced or sold.

REQUIRED

A.

Calculate the breakeven point in units and in revenue.

B.  

Calculate the number of units and the amount of revenues that would be needed for after-tax income of $3,000.

C.  

Calculate the margin of safety in units and the margin of safety percentage.

D.  

Calculate the degree of operating leverage.

Solution

BREAK EVEN POINT= FIXED COST/CONTRIBUTION PER UNIT) * SALES UNIT

B do reverse calculation

c. margin of saftey percentage method =actual sales - breakeven point sales) / actual sales

-unit method = actual sales - breakeven point sales) / sale price per unit

1- unit method = 9600-8400)/4.8 = 250
2. percentage = 1200/9600 = 0.125 or 12.5%

D. degree of operating leveage = contribution / EBIT
= 6400/800
=8