Chapter 6, Problem 6E

To determine

(a)

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.

The breakeven point in units and in sales amount if the selling price is increased to $\$675$ per canoe.

Answer to Problem 6E

The breakeven point in units is $\text{297 units}$ and in sales amount is $\$200,475$.

Explanation of Solution

Contribution Margin Income Statement

Particulars		Amount
Sales Price $\left(\text{A}\right)$	$\$675.00$
Variable Cost per Canoe $\left(\text{B}\right)$	$\left(\$168.75\right)$
Contribution Margin $\left(\text{A}-\text{B}\right)$		$\$506.25$

The break-even point in units is calculated as:

$\begin{array}{c}\text{Breakeven Point}=\frac{\text{Fixed Cost}}{\text{Contribution Margin}}\\ =\frac{\$150,000}{\$506.25}\\ =297\text{ units}\end{array}$

The break-even point in sales is calculated as:

$\begin{array}{c}\text{Breakeven Point}=\text{Breakeven sales in units}\times \text{Sales price}\\ =297\text{ units}\times \$675\text{ per unit}\\ =\$200,475\end{array}$

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.

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 if the sales price is $\$675$ per canoe and actual units sold is $650$.

Answer to Problem 6E

The margin safety in units and percentage of sales is $54.32\%$.

Explanation of Solution

The actual sales amount to $\$438,750\left(650\text{ canoes}\times \text{\$675}\right)$

The breakeven sales amount to $\$200,475\left(\text{275 canoes}\times \text{\$675}\right)$

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

$\begin{array}{c}\text{Margin of Safety}=\frac{\text{Actual Sales}-\text{Breakeven Sales}}{\text{Actual Sales}}\\ =\frac{650-297}{650}\\ =54.32\%\end{array}$

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

$\begin{array}{c}\text{Margin of Safety}=\frac{\text{Actual Sales}-\text{Breakeven Sales}}{\text{Actual Sales}}\\ =\frac{\$438,750-\$200,475}{\$438,750}\\ =54.32\%\end{array}$

To determine

(c)

Concept introduction:

Contribution Margin:

The margin of profit which is computed after considering the variable cost only and not the fixed costis known as contribution. In other words, it means the contribution made by selling the product after covering its variable cost to the company.

The number of canoes to be sold to achieve target profit of $\$100,000$.

Answer to Problem 6E

The target sale point in units is $\text{494 units}$.

Explanation of Solution

Contribution Margin Income Statement

Particulars		Amount
Sales Price $\left(\text{A}\right)$	$\$675.00$
Variable Cost per Canoe $\left(\text{B}\right)$	$\left(\$168.75\right)$
Contribution Margin $\left(\text{A}-\text{B}\right)$		$\$506.25$

The number units to be sold for achieving the target profit are calculated as:

$\begin{array}{c}\text{Target Sales}=\frac{\text{Fixed Cost}+\text{Target Profit}}{\text{Contribution Margin}}\\ =\frac{\$150,000+\$100,000}{\$506.25}\\ =494\text{ units}\end{array}$

The sales for achieving the target profit are calculated as:

$\begin{array}{c}\text{Target Sales}=\text{Target sales in units}\times \text{Sales price}\\ =494\text{ units}\times \$675\text{ per unit}\\ =\$333,450\end{array}$