1. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2011.

Variable
cost per unit is $60 and total fixed costs are $1,640,000.
Required: Calculate (a) contribution margin and (b) operating income

Answer

A. Contribution margin
= (Sp * Q) - (Vcu * Q) -Fc
= (68 * 410000) - (60 * 410000) - 1640000
= 27880000 -24600000 - 1640000
= 27880000 - (26240000)
= 1640000.00

contribution margin = Sales - Variable cost

=27880000 - 24600000
=3,280,000.00
B. Operating income
= (Sp - Vcu) * (Qu) - Fc
= (68 - 60) * 410,000 – 1,640,000
= 8 * 410,000 – 1,640,000
= 3,280,000 – 1,640,000
= 1640000.00

2. Trendy Toes, Co., produces sports socks. The company has fixed costs of $95,000 and
variable costs of $0.95 per package. Each package sells for $1.90.
Requirements:
a) Compute the contribution margin per package and the contribution margin ratio.
b) Find the breakeven point in units and in dollars, using the contribution margin
approach.
c) Compute the company’s margin of safety if its current monthly sales level is
$250,000.
 d) Compute the sales in units required to produce a net income of $200,000

Solutions

A. Compute the contribution margin per package and the contribution margin
ratio.

Contribution margin per package =unit selling price - Unit variable cost

=1.90 - 0.95
=0.95
Contribution margin ratio =Unit contribution margin
Unit selling price
0.95
=
1.90

=0.5
B. Find the breakeven point in units and in dollars. Using the contribution margin approach.

Answer
b) i) B.E point in unit =fixed cost
c.m.per unit
=95.000
0.95
B.E.POINI IN UNIT =100,000 units
ii) B.E point in dollars = fixed cost
c.m. ratio
=95.000
0.5

B.E.P.IN DOLLAR=$190,000

a) Margin of safety= actual (expected) sales- break even sales

= 250,000 – 190,000
M.S=60,000

d) Unit sales= fixed cost + target income

c.margin per unit
 = 95,000 + 200,000
0.95
UNIT SALES =310,526.32 UNITS