Current operating income for Bay Area Cycles Co is 22000 Sel

Current operating income for Bay Area Cycles Co. is $22,000. Selling price per unit is $100, the contribution margin ratio is 25%, and fixed expense is $88,000.

Required:

1. Calculate Bay Area Cycle’s break-even point in units and total sales dollars.

2. Calculate Bay Area Cycle’s margin of safety and margin of safety ratio.

Solution

1. Break-even units = Fixed expenses / Contribution margin per unit

= $88,000 / $25

= 3,520 units

Break-even dollars = Fixed expenses / Contribution margin ratio

= $88,000 / 0.25

= $352,000

2. Margin of safety = Current sales – Break-even sales

= ($100 × 4,400 units) – $352,000

= $88,000

Margin of safety ratio = Margin of safety / Current sales

= $88,000 / $440,000

= 20%