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Question: This problem continues the Piedmont Computer Company situation from Chapter 19. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Average fixed costs per month are \(156,000.

Requirements

1. What is the number of units that must be sold each month to reach the breakeven point?

2. If the company currently sells 945 units per month, what is the margin of safety in units and dollars?

3. If Piedmont Computer Company desires to make a profit of \)15,000 per month, how many units must be sold?

4. Piedmont Computer Company thinks it can restructure some costs so that fixed costs will be reduced to \(90,000 per month, but the weighted-average variable cost per unit will increase to \)525 per unit. What is the new breakeven point in units? Does this increase or decrease the margin of safety? Why or why not?

Short Answer

Expert verified

Answer

  1. The Break-even point is520 units
  2. The margin of safety is425 units and$318,750
  3. 570 must sell to earn a profit of$15,000
  4. The new break-even point is400 units, and the margin of safety is545 units.

Step by step solution

01

Meaning of Break-even Point

The break-even point is when the total revenue earned by the business entity equals the total expenditure incurred, indicating that the firm has no loss or gain.

02

Calculation of break-even point in units 

Requiredsalesinunits=Fixedcost+TargetprofitContributionmarginperunit=$156000+$0$750-$450=$156000$300=520Units

The company must sell 520 units each month to reach the breakeven point.

03

Calculation of margin of safety

CalculationofmarginofsafetyinunitsMarginofsafetyinunits =currently sellsunits per month-Breakevensalesunits=945-520=425UnitsCalculationofmarginofsafetyindollarsMarginofsafetyindollars =Totalsales-Breakevensales=945×$750-520×$750=$708,750×$390,000=$318,750

04

Calculation of the desired number of units sold to earn a profit of $15,000

Requiredunits=Fixedcost+TargetprofitContributionmarginperunit=$156,000+$15,000$750-$450=$171,000$300=570Units

To make a profit of $15,000 per month, the company must sell 570 units.

05

Calculation of new break-even point

Breakevenunits=Fixedcost+TargetprofitContribution margin perunit=$90,000+$0$750-$525=$90,000$225=400Units

Calculation of new margin of safety

Marginofsafety=Unitsells-Breakevenunits=945-400=545Units

When the breakeven unit decreases,the margin of safety unit increases because the earning or net profit increases.

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Most popular questions from this chapter

What is a variable cost? Give an example.

Of the three approaches to calculate sales required to achieve the breakeven point, which one(s) calculate the required sales in units and which one(s) calculate the required sales in dollars?

Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.

Requirements

1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.

2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

The budgets of four companies yield the following information:

Company

Beach Lake Mountain Valley

Net Sales Revenue \( 1,615,000 \)(d) \( 1,050,000 \)(j)

Variable Costs (a) 60,000 525,000 100,800

Fixed Costs (b) 232,000 260,000 (k)

Operating Income (Loss) 285,600 (e) (g) 31,500

Units Sold 170,000 10,000 (h) (l)

Contribution Margin per Unit \( 3.80 \) (f) \( 75.00 \) 9.00

Contribution Margin Ratio (c) 80% (i) 30%

Requirements

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)

2. Which company has the lowest breakeven point in sales dollars?

3. What causes the low breakeven point?

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