Chapter 6, Problem 22E

To determine

(a)

Breakeven Point:

The level of sales where the company is neither on profit nor loss is termed as breakeven point. In other words, that level of sales at which the fixed cost of the business is recovered.

To compute:

The breakeven point if the fixed cost is $\$1,000,000$.

Answer to Problem 22E

The breakeven point is $\$2,500,000$.

Explanation of Solution

Fixed cost is $\$1,000,000$

Contribution margin is $40\%\left(1-60\%\right)$

The break-even point in units is calculated as:

$\begin{array}{c}\text{Breakeven Point}=\frac{\text{Fixed Cost}}{\text{Contribution Margin Ratio}}\\ =\frac{\$1,000,000}{40\%}\\ =\$2,500,000\end{array}$

To determine

(b)

Concept introduction:

Breakeven Point:

The level of sales where the company is neither on profit nor loss is termed as breakeven point. In other words, that level of sales at which the fixed cost of the business is recovered.

To prove:

The breakeven point by using contribution margin statement.

Answer to Problem 22E

The breakeven point is $\$2,500,000$.

Explanation of Solution

Income Statement:

Particulars	Amount
Sales Price $\left(\text{A}\right)$	$\$2,500,000$
Variable Cost per Canoe $\left(\text{B}\right)$	$\left(\$1,500,000\right)$
Contribution Margin $\left(\text{A}-\text{B}\right)$	$\$1,000,000$
Less: Fixed Cost	$\$1,000,000$
Profit	$-$

To determine

(c)

Concept introduction:

Target Profit:

The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.

The total sales to achieve target profit of $\$800,000$.

Answer to Problem 22E

The target sale point is $\text{\$4,500,000}$.

Explanation of Solution

Fixed cost is $\$1,000,000$

Contribution margin is $40\%\left(1-60\%\right)$

The total sales for achieving the target profit are calculated as:

$\begin{array}{c}\text{Target Sales}=\frac{\text{Fixed Cost}+\text{Target Profit}}{\text{Contribution Margin Ratio}}\\ =\frac{\$1,000,000+\$800,000}{40\%}\\ =\$4,500,000\end{array}$

To determine

(d)

Concept introduction:

Target Profit:

The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.

To prove:

The target sale by using contribution margin statement.

Answer to Problem 22E

The target sale is $\$4,500,000$.

Explanation of Solution

Income Statement:

Particulars	Amount
Sales Price $\left(\text{A}\right)$	$\$4,500,000$
Variable Cost per Canoe $\left(\text{B}\right)$	$\left(\$2,700,000\right)$
Contribution Margin $\left(\text{A}-\text{B}\right)$	$\$1,800,000$
Less: Fixed Cost	$\$1,000,000$
Profit	$\$800,000$

To determine

(e)

Concept introduction:

Margin of Safety:

The margin of safety is the margin enjoyed by the company which is achieved over and above the breakeven sales. It is a difference of actual sales and breakeven sales.

To compute:

The margin safety in units and percentage of sales.

Answer to Problem 22E

The margin safety is $\$2,000,000$ and percentage of sales is $44.44\%$.

Explanation of Solution

The actual sales amount to $\$4,500,000$

The breakeven sales amount to $\$2,500,000$

The margin of safety in terms of amount is calculated as:

$\begin{array}{c}\text{Margin of Safety}=\text{Actual Sales}-\text{Breakeven Sales}\\ =\$4,500,000-\$2,500,000\\ =\$2,000,000\end{array}$

The margin of safety in terms of percentage of sales is calculated as:

$\begin{array}{c}\text{Margin of Safety}=\frac{\text{Actual Sales}-\text{Breakeven Sales}}{\text{Actual Sales}}\\ =\frac{\$4,500,000-\$2,500,000}{\$4,500,000}\\ =44.44\%\end{array}$