Drake Company produces a single product. Last year's income statement is as follows: Sales (25,000 units) $1,547,500 Less: Variable costs 1,005,000 Contribution margin $542,500 Less: Fixed costs 296,300 Operating income $246,200 Required: Question Content Area 1. Compute the break-even point in units and sales revenue. In your computations, round the contribution margin per unit to the nearest cent and round the contribution margin ratio to four decimal places. Round your final answers to the nearest whole unit or dollar. Break-even units units Break-even dollars 2. What was the margin of safety in dollars for Drake Company last year? Round your final answer to the nearest whole dollar.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Drake Company produces a single product. Last year's income statement is as follows:
| Sales (25,000 units) | $1,547,500 |
| Less: Variable costs | 1,005,000 |
| Contribution margin | $542,500 |
| Less: Fixed costs | 296,300 |
| Operating income | $246,200 |
Required:
Question Content Area
1. Compute the break-even point in units and sales revenue. In your computations, round the contribution margin per unit to the nearest cent and round the contribution margin ratio to four decimal places. Round your final answers to the nearest whole unit or dollar.
| Break-even units | units | |
| Break-even dollars |
2. What was the margin of safety in dollars for Drake Company last year? Round your final answer to the nearest whole dollar.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
