Question

Victoria Company reports the following operating results for the month of April.

VICTORIA COMPANY
CVP Income Statement
For the Month Ended April 30, 2020

Total

Per Unit

Sales (9,000 units) $450,000 $50
Variable costs 225,000 25.00
Contribution margin 225,000 $25.00
Fixed expenses 184,950
Net income $40,050

Management is considering the following course of action to increase net income: Reduce the selling price by 5%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 20%.

Using the contribution margin technique, compute the break-even point in units and dollars and margin of safety in dollars: (Round intermediate calculations to 4 decimal places e.g. 0.2522 and final answer to 0 decimal places, e.g. 2,510.)

(a) Assuming no changes to selling price or costs.

Break-even point
Enter a number of units

units
Break-even point
$Enter a dollar amount

Margin of safety
$Enter a dollar amount


(b1) Assuming changes to sales price and volume as described above.

Break-even point
Enter a number of units

units
Break-even point
$Enter a dollar amount

Margin of safety
$Enter a dollar amount

Answer 1

Answer:

Victoria Company

1. No Changes:

Break-even point in units  = 7,398

Break-even point in dollars = $369,900

Margin of safety = $80,100

2. With changes in sales price and costs:

Break-even point in units = Fixed expense/Contribution margin per unit

= 8,220

Break-even point in dollars = Fixed expense/Contribution ratio

= $390,437

Margin of safety in dollars

= $122,563

Explanation:

a) Data and Calculations:

VICTORIA COMPANY

CVP Income Statement

For the Month Ended April 30, 2020

                                    Total       Per Unit

Sales (9,000 units) $450,000   $50

Variable costs           225,000     25.00

Contribution margin 225,000   $25.00

Fixed expenses         184,950

Net income               $40,050

Break-even point in units = $184,950/$25 = 7,398

Break-even point in dollars = $184,950/0.5 = $369,900

Margin of safety = $450,000 - $369,900 = $80,100

Management's decision to reduce selling price by 5%

New selling price = $47.50 ($50 * 95%)

Unit sales = 10,800 (9,000 * 1.2)

                                   Total       Per Unit

Sales (10,800 units) $513,000   $47.50

Variable costs           270,000     25.00

Contribution margin 243,000   $22.50

Fixed expenses         184,950

Net income               $58,050

Break-even point in units = Fixed expense/Contribution margin per unit

= $184,950/$22.50

= 8,220

Contribution ratio = $22.50/$47.50 = 0.4737

Break-even point in dollars = Fixed expense/Contribution ratio

= $184,950/0.4737

= $390,437

Margin of safety in dollars = Budgeted Sales - Break-even Sales

= $513,000 - $390,437

= $122,563