PROBLEM I a Rickys Repair Shop has a monthly target profit o

PROBLEM I a) Ricky\'s Repair Shop has a monthly target profit of $17,000 Variable costs ate 60% of sales, and monthly fixed costs are $8,000 Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal 2. Express Ricky\'s margin of safety as a percentage of target sales b) The budgets of four companies yield the following information Company Down Left Right 375,500 Sales Revenue Variable Costs Fixed Costs Operating Income (Loss) Units Sold Contribution Margin per UnitS Contribution Margin Ratio 2,187,500 374,000 77,000225,000 216,00 256,700 85,400 125,000 14,000 3.50 75.00 18.00 80% 20% Requirements 1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent) 2. Which company has the lowest breakeven point in sales dollars? 3. What causes the low breakeven point?

Solution

Answers

A [given]

% of Variable cost to Sale

60%

B = 100% - A

Hence, CM Ratio =

40%

Requirement 1

A

Target Profit

$                             17,000.00

B

Monthly Fixed Cost

$                               8,000.00

C = A+B

Total Contribution margin required to attain target profit

$                             25,000.00

D [calculated above]

CM Ratio

40%

E = C/D

Sales Required for target profit

$                             62,500.00

F = B/D

Break Even Sale

$                             20,000.00

G = E - F

Margin of Safety Sales in Dollars

$                             42,500.00

Requirement 2

A

Margin of Safety Sales in Dollars

$                             42,500.00

B

Sales Required for target profit

$                             62,500.00

C = (A/B) x 100

Margin of Safety % of target sale

68%

---Note: Few amounts of ‘LEFT’ company cannot be calculated due to limited information.

Requirement 1

Working

Up

Down

Left

Right

A

Sales Revenue

$                       2,187,500.00

$             385,000.00

$                   375,500.00

$                     467,500.00

B

Variable Cost

$                       1,750,000.00

$               77,000.00

$                   225,000.00

$                     374,000.00

C

Fixed Cost

$                           180,800.00

$             216,000.00

$                          8,100.00

D = A - B - C

Operating Income (Loss)

$                           256,700.00

$               92,000.00

$                        85,400.00

E

Unit Sold

                                    125,000

                        14,000

                                 2,007

                                   5,194

F = A - B

Contribution margin per unit

$                                        3.50

$                       22.00

$                             75.00

$                                18.00

G = (F/A) x 100

Contribution Margin Ratio

20%

80%

40.08%

20%

Working for above calculation:

Working

Up

Down

Left

Right

A

Sales Revenue

2187500

=77000/(100%-80%)

375500

=374000/(100%-20%)

B

Variable Cost

=2187500-(125000*3.5)

77000

225000

374000

C

Fixed Cost

=2187500-1750000-256700

216000

=467500-374000-85400

D = A - B - C

Operating Income (Loss)

256700

=385000-77000-216000

85400

E

Unit Sold

125000

14000

=+(375500-225000)/75

=+(467500-374000)/18

F = A - B

Contribution margin per unit

3.5

=+(385000-77000)/14000

75

18

G = (F/A) x 100

Contribution Margin Ratio

=+(125000*3.5)/2187500

0.8

=+(375500-225000)/375500

0.2

Requirement 2

Up

Down

Left

Right

A

Fixed Cost

$                           180,800.00

$             216,000.00

$                                    -  

$                          8,100.00

B

Contribution Margin Ratio

20%

80%

40%

20%

C=A/B

Break Even point

$                           904,000.00

$             270,000.00

$                                    -  

$                        40,500.00

Company with Lowest Break Even point = “Right Company”

Requirement 3

Low Break Even point is caused by Lower Fixed Cost (and, or) Higher CM Ratio.

A [given]	% of Variable cost to Sale	60%
B = 100% - A	Hence, CM Ratio =	40%