Larry sells each unit for $500. Variable costs per unit equal $300. Totalfixed costs equal $800,000. Larry is currently sellig 5,000 units per period and would like to earn net income of $400,00.
comput: Break-evn point indollras, sales units necessary to attain desired income, and margin of safety ration for current operations.
Margin of safety= what pecent? not sure where to go from here.
Miley Railroad Co. is about to issue $259,000 of 9-year bonds paying an 12% interest rate, with interest payable semiannually. The discount rate for such securities is 12%.
To compute the break-even point in dollars, we need to determine the number of units that need to be sold to cover all the fixed and variable costs. The formula to calculate the break-even point in dollars is:
Break-even point (in dollars) = Fixed costs / Contribution margin ratio
First, let's calculate the contribution margin per unit:
Contribution margin per unit = Selling price per unit - Variable cost per unit
= $500 - $300
= $200
Next, let's calculate the contribution margin ratio:
Contribution margin ratio = Contribution margin per unit / Selling price per unit
= $200 / $500
= 0.4
Now, we can calculate the break-even point in dollars:
Break-even point (in dollars) = $800,000 / 0.4
= $2,000,000
Therefore, the break-even point in dollars is $2,000,000.
To compute the sales units necessary to attain the desired income, we need to consider the fixed costs, desired net income, and the contribution margin per unit.
Required units to attain desired income = (Fixed costs + Desired net income) / Contribution margin per unit
= ($800,000 + $400,000) / $200
= 6,000 units
Therefore, Larry needs to sell 6,000 units to attain the desired net income of $400,000.
Now, let's calculate the margin of safety ratio for current operations. The margin of safety ratio is a measure of how much sales can fall below the break-even point before a loss is incurred. The formula to calculate the margin of safety ratio is:
Margin of safety ratio = (Actual sales - Break-even sales) / Actual sales
To compute the margin of safety ratio, we need to determine the actual sales. Since Larry is currently selling 5,000 units per period, we can calculate the actual sales as follows:
Actual sales = Number of units sold * Selling price per unit
= 5,000 * $500
= $2,500,000
Now, let's calculate the margin of safety ratio:
Margin of safety ratio = ($2,500,000 - $2,000,000) / $2,500,000
= $500,000 / $2,500,000
= 0.2
Therefore, the margin of safety ratio for Larry's current operations is 0.2 or 20%.
I hope this helps! Let me know if you have any further questions.