Question

Contribution Margin, CVP, Net Income, Margin of Safety Nail Glow, Inc., produces novelty nail polishes. Each bottle sells for $5.90. Variable unit costs are as follows: Fixed overhead costs are $34, 475 per year. Fixed selling and administrative costs are $6, 720 per year. Nail Glow sold 35,000 bottles last year. What is the contribution margin per unit for a bottle of nail polish? $ per unit What is the contribution margin ratio? Round your answer to four decimal places. How many bottles must be sold to break even? bottles What is the break-even sales revenue? Round your answer to the nearest dollar, if rounding is required. $ What was Nail Glow's operating income last year? $ What was the margin of safety in revenue? $ Suppose that Nail Glow, Inc., raises the price to $6.50 per bottle, but anticipated sales will drop to 28, 750 bottles. What will the new break-even point in units be? Round your answer up to the nearest whole number of units. Should Nail Glow raise the price?

Answer 1

Answer:1) contribution margin per unit=$4.7230

2) contribution margin ratio= 80.050%

3) Break even unit=8,722

4)Break Even sales revenue=$51,461

5) operating income =$165,305

6)Margin of safety=$155,039

7)New Breakeven units=8130 units

8)yes the price should be increased, because at a lower quantity it will break even.

Explanation:

Contribution margin =Selling price-fixed cost

(5.9×35,000)-(34,475+6,720)

=206,500-41,195=$165,305

Contribution margin per unit=165,305/35000=$4.7230

Contribution margin ratio=unit contribution margin/unit selling price×100

4.723/5.9×100=80.0508%

Break even unit=fixed cost/unit contribution Margin=41,195/4.7230

=8,722 units

Break even revenue=fixed cost/contribution Margin ratio

41195/0.800508=$51,461

Operating income =sales revenue-fixed cost=206500-41,195=$165,305

When and if selling price =$6.50 , sales=28,750

Contribution Margin=total revenue-total fixed cost

=28750×6.5-41,195=$145,680

Unit CM=CM/sales unit

=145,680/28,759=5.06713

CM ratio=5.06713/6.5=0.7796

BEV sales=FC/CMR=41,195/0.7796=$52,841

Breakeven BEV units=fixed cost/contribution Margin ratio

=41195/5.0671=8,130 units

It is better to increase price to$ 6.5 because the fixed cost was defrayed at a much lower quantity of 8,130 when compared to 8,722 units.

Answer 2

Answer:

Question is incomplete. Variable unit costs are as follows:

{Acrylic base - $ 0.86, Pigment- 0.57, other ingredient -0.43,  Bottle packing materials- 1.15, Selling Commission- 0.14}

Contribution margin per unit is $ 2.75

Per unit Contribution ratio is $ 2

Explanation:

Contribution margin is calculated by subtracting variable cost of the product from its price.

Mathematically it can be calculated as follows;

Contribution Margin=  Price - variable Cost

According to given data,

Price of the bottle = $ 5.90

Variable Cost = 0.86+0.57+0.43+1.15+0.14= $ 3.15

Contribution Margin = $ 5.90 - $ 3.15 = $ 2.75

Contribution Margin ratio = Contribution Margin / Sales

Contribution Margin ratio = $ 2.75 /$ 5.90

Contribution Margin ratio =  0.47

Break even points in Unit = Fixed Cost / Contribution Margin per unit -- (a)

According to given data,

Fixed Overhead cost = $ 34,475

Fixed selling & Administrative cost = $ 6,720

Putting the values in equation (a)

Break even points in Unit = ($ 34,475+ $ 6,720)/ $ 2.75

Break even points in Unit = 14,980 units

Break even sales Revenue = 14,980 x $ 5.90 =$ 88, 382

Nail Glow's Operating Income last year = Units sold x Price of bottle

Nail Glow's Operating Income last year = 35000*5.90= $ 206,500

Margin of Safety = Actual Sales - Break even Point sales

Margin of Safety = $ 206,500- $ 88,382 = $ 118,118

Suppose Nail Glow increase the price to $ 6.50

New Sales in unit = 28, 750 bottles

Contribution margin at new Price = New Price - Variable Cost

Contribution Margin at new price = $ 6.50 - $ 3.15 = $ 3.35

Break even points in Unit at new price = ($ 34,475+ $ 6,720) / $ 3.35

Break even points in Unit at new price = 12,297.015 bottles

Yes, Nail Glow should raised the price. Though the anticipated sales will decrease but the margin of safety at new price will increase as shown below;

Margin of Safety at new price = $ 206,500- (12,297.015 x 6.50)

Margin of Safety at new price = $ 206,500- $ 79,931 = $ 126,569