Sports R Us is thinking about adding a new product line Voll

Sports R Us is thinking about adding a new product line. Volleyballs. 1. Calculate contribution margin ratio, breakeven point in units and dollars, and margin of safety in both units and dollars assuming sales of 45, 000 ( I feel as if information is missing, but I suspect it is a lack of knowledge on my end)

The projected income statement: Unites 50, 000

Revenues   

     $500,000

Cost of Goods Sold

Variable Manufacturing Costs

$275,000

Operating Costs

Variable Marketing Costs

$25,000

Fixed Setup Costs and Maintenance

$33,000

Fixed Maintenance Costs

$40,000

Fixed General and Administrative Costs

$15,000

Solution

Projected income statement will be used for calculating contribution margin ratio and break even point, then margin of safety will be calculated by using given sales of $45,000. The calculation is shown as follows:-

1) Contribution margin = Revenues - Total Variable Cost

= Revenues - Variable Manufacturing Costs - Variable Marketing Costs

= $500,000 - $275,000 - $25,000 = $200,000

Contribution margin ratio = (Contribution margin/Revenues)*100 = ($200,000/$500,000)*100

= 40%

Contribution margin per unit = Total Contribution margin/Units sold = $200,000/50,000 units = $4 per unit

Breakeven point (in units) = Total Fixed cost/Contribution margin per unit

= ($33,000+$40,000+$15,000)/$4 per unit = $88,000/$4 = 22,000 units

Breakeven point (in dollars) = Total Fixed Cost/Contribution margin ratio = $88,000/40% = $220,000

Margin of Safety (in units) = Current sales - Breakeven Sales = 45,000 units - 22,000 units = 23,000 units

Selling Price per unit = Revenues/Units sold = $500,000/50,000 = $10 per unit

Margin of Safety (in dollars) = Margin of safety units*Selling price per unit = 23,000 units*$10 per unit = $230,000