# Quiz 5

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• Published : March 11, 2013

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Quiz 5
Pringle Company distributes a single product. The company’s sales and expenses for a recent month follow:

Total Per Unit
Sales\$620,000 \$40
Variable expenses 434,000 28
________________________________________________________________________________________________________________________________________________________________________________________________________ Contribution margin 186,000 \$12

Fixed expenses 150,000 ________________________________________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________ Net operating income\$ 36,000

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ________________________________________

Required:
1.What is the monthly break-even point in units sold and in sales dollars? (Omit the "\$" sign in your response.)

Break-even point in unit sales units

Break-even point in sales dollars\$

________________________________________

2.Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "\$" sign in your response.)

Total contribution margin\$

3.How many units would have to be sold each month to earn a target profit of \$54,000? Use the formula method.

Units sold

4.Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.(Round your percentage answer to 2 decimal places. Omit the "\$" and "%" signs in your response.)

Dollars Percentage
Margin of safety\$
%

________________________________________

5.What is the company’s CM ratio? If monthly sales increase by \$98,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "\$" and "%" signs in your response.)

CM ratio %

Net operating income increases by\$

________________________________________

Explanation:
1.
Profit=(Unit CM × Q) − Fixed expenses
\$0=((\$40 − \$28) × Q) − \$150,000
\$0=(\$12 × Q) − \$150,000
\$12Q=\$150,000
Q=\$150,000 ÷ \$12 per unit
Q=12,500 units, or at \$40 per unit, \$500,000

2.
The contribution margin at the break-even point is \$150,000 because at that point it must equal the fixed expenses.

3.
Unit sales to attain
target profit=Target profit + Fixed expenses
Unit contribution margin

=\$54,000 + \$150,000 = 17,000 units
\$12 per unit

4.
Margin of safety in dollar terms:

Margin of safety
in dollars=Total sales - Break even sales
=\$620,000 − \$500,000 = \$120,000

Margin of safety in percentage terms:

Margin of safety
percentage=Margin of safety in dollars
Total sales
=\$120,000 = 19.35% (rounded)
\$620,000

5.
The CM ratio is 30%.

Expected total contribution margin: \$718,000 × 30%\$215,400 Present total contribution margin: \$620,000 × 30% 186,000 ________________________________________________________________________________ Increased contribution margin\$29,400

________________________________________________________________________________________________________________________________________________________________ ________________________________________

Reveen Products sells camping equipment. One of the company’s products, a camp lantern, sells for \$120 per unit. Variable expenses are \$84 per lantern, and fixed expenses associated with the lantern total \$172,800 per month.

Required:
1.Compute the company’s break-even point in number of...