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Financial & Managerial Accounting
Found in: Page 834
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Zhao Co. has fixed costs of $354,000. Its single product sells for $175 per unit, and variable costs are $116 per unit. If the company expects sales of 10,000 units, compute its margin of safety (a) in dollars and (b) as a percent of expected sales.

(a) The margin of safety in dollars is $677,273.

(b) The margin of safety as a percentage of sales is 38.70%.

See the step by step solution

Step by Step Solution

Step 1: Definition of Margin of Safety

The margin of safety is when the sales made by the business entity are more than the breakeven point. It is better if the actual sales are higher than the breakeven sales.

Step 2: (a) Margin of safety in dollars

Particular

Amount $

Expected sales 10,000 units @ $175 per unit

$1,750,000

Less: Break-even sales

(1,072,727)

Margin of safety

$677,273

Working note:

Step 3: (b) Margin of safety in percentage

Most popular questions for Business-studies Textbooks

This year Burchard Company sold 40,000 units of its only product for $25 per unit. Manufacturing and selling the product required $200,000 of fixed manufacturing costs and $325,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Material

$8.00

Direct labor (paid on the basis of completed units)

5.00

Variable overhead cost

1.00

Variable selling and administrative costs

0.50

Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Required

1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2.

2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.

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