How to find margin of safety in dollars

5-2A Prepare A CVP Income Statement, Compute Break-Even Point, Contribution Margin Ratio, Margin Of Safety Ratio And Sales For Target Net Income

P5-2A Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio
and sales for target net income
Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle
to retailers, who charge customers 75 cents per bottle. For the year 2017, management estimates the following revenues
and costs.
Sales
$1,800,000
Selling expenses - variable
$70,000
Direct materials
430,000 Selling expenses - fixed
65,000
Direct labor
360,000 Administrative expenses - variable
20,000
Manufacturing overhead- variable
380,000 Administrative expenses - fixed
60,000
Manufacturing overhead -fixed
280,000
Instructions
(a) Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)
(b) Compute the break-even point in (1) units and (2) dollars.
(c ) Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)
(d) Determine the sales dollars required to earn net income of $180,000.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)
JORGE COMPANY
CVP Income Statement (Estimated)
For the Year Ending December 31, 2017
Sales
Variable expenses
Cost of goods sold
Selling expenses
Administrative expenses
Total variable expenses
Contribution margin
Fixed expenses
Cost of goods sold
Selling expenses
Administrative expenses
Total fixed expenses
Net income

(b)

$1,800,000
$1,170,000
135,000
80,000
1,385,000
415,000
280,000
Value
60,000
?
?

Compute the break-even point in (1) units and (2) dollars.
(b)(1)

Value
Value
?

Fixed costs
Unit contribution margin
Break-even point in units

(b)(2)

Break-even point in units
Unit selling price
Unit variable costs
Unit contribution margin

Value
Value
?

Break-even point in dollars
Break-even point in units
Unit selling price
Break-even point in dollars

Value
Value
?

(c ) Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)
Contribution margin ratio
Unit contribution margin
Unit selling price
Contribution margin ratio
Margin of safety ratio
Total sales
Break-even sales
Margin of safety (dollars)
Total sales
Margin of safety ratio

(d)

Value
Value
?

Value
Value
Value
Value
Value

Determine the sales dollars required to earn net income of $180,000.
Sales dollars required to earn target income
Fixed costs
Value
Target income
Value
Total fixed cost + target income
?
Contribution margin ratio
?

Sales dollars required

?

After you have completed P5-2A, consider the following additional question
1.
Assume that the unit selling price per bottle changed to $0.60 each, and fixed manufacturing costs
increased to $300,000. Show impact of these changes on calculations.

CD5 - EXCEL Tutorial
CURRENT DESIGNS
Bill Johnson, sales manager, and Diane Buswell, controller at Current Designs are beginning to analyze the cost
considerations for one of the composite models of the kayak division. They have provided the following production
and operational costs necessary to produce one composite kayak.

Kevlar®
Resin and supplies
Finishing kit (seat, rudder, ropes, etc.)
Labor
Selling and administrative expenses - variable
Selling and administrative expenses - fixed
Manufacturing overhead - fixed

$250 per kayak
$100 per kayak
$170 per kayak
$420 per kayak
$400 per kayak
$119,000 per year
$240,000 per year

Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget projections for
the upcoming year. Bill has informed you that the selling price of the composite kayak will be $2,000.
Instructions
(a) Calculate variable cost per unit.
(b) Determine the unit contribution margin.
(c ) Using the unit contribution margin, determine the break-even point in units for this product line.
(d) Assume that Current Designs plans to earn $270,000 on this product line. Using the unit contribution
margin, calculate the number of units that need to be sold to achieve this goal.
(e ) Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model.
Using your results from part (c ), calculate the margin of safety and the margin of safety ratio.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a) Calculate variable cost per unit.
Kevlar®
Resin and supplies
Finishing kit (seat, rudder, ropes, etc.)
Labor
Selling and administrative expenses - variable
Total variable costs per unit

Value
Value
Value
Value
Value
?

(b) Determine the unit contribution margin.
Unit selling price
Unit variable cost
Unit contribution margin

Value
?
?

(c ) Using the unit contribution margin, determine the break-even point in units for this product line.
Selling and administrative expenses - fixed
Manufacturing overhead - fixed
Total fixed costs (a)
Unit contribution margin (b)
Break-even points (units) (a ÷ b)

Value
Value
?
Value
?

(d) Assume that Current Designs plans to earn $270,000 on this product line. Using the unit contribution
margin, calculate the number of units that need to be sold to achieve this goal.
Total fixed costs
Target net income
Total fixed costs + target net income (a)
Unit contribution margin (b)
Units need to be sold (a ÷ b)

Value
Value
?
Value
?

(e ) Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model.
Using your results from part (c ), calculate the margin of safety and the margin of safety ratio.
Margin of safety
Actual (expected) sales
Break-even sales
Margin of safety (dollars)

Value
Value
?

Margin of safety ratio
Margin of safety (dollars) (a)
Actual (expected) sales (b)
Margin of safety ratio (a ÷ b)

Value
Value
?

After you have completed CD-5, consider the following additional question
1. Assume that the unit selling price per kayak changed to $2,200 each, and fixed manufacturing overhead
increased to $360,000. Show impact of these changes on calculations.

E6-3 Compute net income under different alternatives
Barnes Company reports the following operating results for the month of August: sales $325,000
(units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following
independent courses of action to increase net income.
1.
Increase selling price by 10% with no change in total variable costs or sales volume.
2.
Reduce variable costs to 58% of sales.
3.
Reduce fixed costs by $15,000.
Instructions
Compute the net income to be earned under each alternative. Which course of action will produce the
highest net income?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

1.

Increase selling price by 10% with no change in total variable costs or sales volume.
Current selling price
New selling price
(Round to nearest cent)

?
?

Total sales
Less: variable costs
Contribution margin
Less: fixed costs
Net income

2.

3.

?
?
?
Value
?

Reduce variable costs to 58% of sales.
Total Sales
Less: variable costs
Contribution margin
Less: fixed costs
Net income

Value
Value
?
Value
?

Reduce fixed costs by $15,000.
Total Sales
Less: variable costs
Contribution margin
Less: fixed costs
Net income

Value
Value
?
Value
?

After you have completed E6-3, consider the following additional questions.
1.
Assume that unit selling price increased 5% with no change in total variable costs or sales volume.
2.
Assume variable costs decreased to 53% of sales.
3.
Assume that fixed costs increased by $20,000.
Which course of action will produce the highest net income?

CD6 EXCEL Tutorial
CURRENT DESIGNS
Current Designs manufactures two different types of kayak, rotomolded kayaks and composite kayaks.
The following information is available for each product line.

Sales price/unit
Variable costs/unit

Rotomolded
$950
$570

Composite
$2,000
$1,340

The company's fixed costs are $820,000. An analysis of the sales mix identifies that rotomolded kayaks
make up 80% of the total units sold.
Instructions
(a) Determine the weighted-average unit contribution margin for Current Designs.
(b) Determine the break-even points in units for Current Designs and identify how many units of each
type of kayak will be sold at the break-even point. (Round to the nearest whole number.)
(c ) Assume that the sales mix changes, and rotomolded kayaks now make up 70% of total units sold.
Calculate the total number of units that would need to be sold to earn a net income of $2,000,000
and identify how many units of each type of kayak will be sold at this level of income. (Round to the
nearest whole number.)
(d) Assume that Current Designs will have sales of $3,000,000 with two-thirds of the sales dollars in
rotomolded kayaks and one-third of the sales dollars in composite kayaks. Assuming $660,000 of fixed
costs are allocated to the rotomolded kayaks and $160,000 to the composite kayaks, prepare a CVP
income statement for each product line.
(e ) Using the information in part (d), calculate the degree of operating leverage for each product line and
interpret your findings. (Round to two decimal places.)

(a) Determine the weighted-average unit contribution margin for Current Designs.

Sales price/unit
Variable costs/unit
Unit Contribution margin (UCM)
Product mix
Weighted Average UCM

Rotomolded
Kayaks
Value
Value
?
Value
?

+

Composite
Kayaks
Value
Value
?
Value
?

?

(b) Determine the break-even points in units for Current Designs and identify how many units of each
type of kayak will be sold at the break-even point. (Round to the nearest whole number.)
Fixed costs
Weighted Average UCM
Breakeven units

Breakeven unit distribution

Value
Value
?
Rotomolded
Kayaks
?

Composite
Kayaks
?

(c ) Assume that the sales mix changes, and rotomolded kayaks now make up 70% of total units sold.
Calculate the total number of units that would need to be sold to earn a net income of $2,000,000
and identify how many units of each type of kayak will be sold at this level of income. (Round to the
nearest whole number.)
Target net income in units:

Sales price/unit
Variable costs/unit
Unit Contribution margin (UCM)
Product mix
Weighted Average UCM

Rotomolded
Kayaks
Value
Value
?
Value
?

Required sales in units:
Total fixed costs
Target net income
Total required sales (dollars)
Weighted Average UCM
Required sales in units

Value
Value
?
?
?

+

Composite
Kayaks
Value
Value
?
Value
?

?

Value
Value
?
?
?

(d) Assume that Current Designs will have sales of $3,000,000 with two-thirds of the sales dollars in
rotomolded kayaks and one-third of the sales dollars in composite kayaks. Assuming $660,000 of fixed
costs are allocated to the rotomolded kayaks and $160,000 to the composite kayaks, prepare a CVP
income statement for each product line.

Sales
Variable Costs
Contribution Margin
Fixed Costs
Net Income

Rotomolded
Kayaks
Value
Value
?
Value
?

Composite
Kayaks
Value
Value
?
Value
?

(e ) Using the information in part (d), calculate the degree of operating leverage for each product line and
interpret your findings. (Round to two decimal places.)
Rotomolded
Kayaks
Contribution Margin (a)
Value
Value
Net Income (b)
Degree of Operating Leverage (a ÷ b
?

Composite
Kayaks
Value
Value
?

Interpretation of findings:

After you have completed CD6, consider the following additional question.
1. Assume that variable cost per unit for the rotomolded kayak and composite kayak changed to $610 and
$1,400 respectively. Show impact of these changes on each of the scenarios provided.

P7-3A Determine if product should be sold or processed further.
Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company's Dargar plant
produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000
ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table
cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional
processing costs for this conversion amount to $240,000.
FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table
cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces
of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The
additional processing costs for this process amounts to $100,000. Both table products can be sold for $14 per $25-ounce bottle.
The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Production in ounces
Revenue
Costs:
CDG costs
TCP costs
Total costs
Weekly gross profit

Table
Cleaner
300,000
$204,000
70000*
0
70,000
$134,000

Process Further
Table Stain
Table
Remover (TSR)
Polish (TP)
300,000
300,000
$168,000
$168,000
52,500
50,000
102,500
$65,500

52,500
50,000
102,500
$65,500

Total
$336,000
105,000 **
100,000
205,000
$131,000

*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the
total physical output.
** If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for
50% of the total physical output and are each allocated 25% of the CDG cost.
Instructions
(a)
Determine if management made the correct decision to not process the table cleaner further by doing the following.
(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.
(2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further.
(3) Compare the resulting net incomes and comment on management's decision.
(b)
Compare the resulting net incomes and comment on management's decision.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.
(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.
Table Cleaner Not Processed Further
Sales:
FloorShine
Table cleaner
Total Revenue
Costs:
CDG
Additional costs of FloorShine
Total costs
Gross profit

(a)

?
?
?

Value
Value
?
?

Determine if management made the correct decision to not process the table cleaner further by doing the following.
(2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further.
Table Cleaner Processed Further
Sales:
FloorShine
Table Stain Remover
Table Polish
Total Revenue
Costs:
CDG
Additional costs of FloorShine
TCP
Total costs
Gross profit

(a)

Value
Value
Value
?

Value
Value
Value
?
?

Determine if management made the correct decision to not process the table cleaner further by doing the following.
(3) Compare the resulting net incomes and comment on management's decision.
Response:

(b)

Compare the resulting net incomes and comment on management's decision.

Incremental revenue
Incremental costs
Total

Don't Process
Table Cleaner
Further
Value
Value
?

Process
Table Cleaner
Further
Value
Value
?

Net Income
Increase
(Decrease)
Value
Value
?

Response:

1.

After you have completed P7-3A, consider the following additional question.
Assume that the selling price of the two table products after further processing changed to $13
for each 25-ounce bottle and the cost of TCP compound to further process changed to $120,000.
How do these changes impact the decision to process or not process further?

CD7 EXCEL Tutorial
CURRENT DESIGNS
Current Designs faces a number of important decisions that require incremental analysis. Consider each
of the following situations independently.
Situation 1
Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president
of a brewing company. He was calling to inquire about the possibility of Current Designs producing "floating
coolers" for a promotion his company was planning. These coolers resemble a kayak but are about one-third
the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip.
The company would be interest in purchasing 100 coolers for the upcoming summer. It is willing to pay $250
per cooler. The brewing company would pick up the coolers upon completion of the order.
Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce
the coolers. After careful analysis, the following costs were identified.
Direct materials
Direct labor

$80/unit
$60/unit

Variable overhead
Fixed overhead

$20/unit
$1,000

Current Designs would be able to modify an existing mold to produce the coolers. The cost of these
modifications would be approximately $2,000.
Instructions
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.

Situation 2
Current Designs is always working to identify ways to increase efficiency while becoming more environmentally
conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the
company should consider replacing the current rotomold oven as a way to realize savings from reduced energy
consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new,
energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out
price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new,
energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and
it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for
$10,000
Instructions
(a) Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,
assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.
(b) Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company
projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss
how that might change your conclusion in (a).

Situation 3
One of Current Designs' competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His
involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an
industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the
most important component of a kayak, the seat. The "Revolution Seating System" is one-of-a-kind, rotating axis seat
that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a
customizable seat position that maximizes comfort for the rider.
Having just designed the "Revolution Seating System", Current Designs must now decide whether to produce the seats
internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows.
Direct materials
Variable overhead

$20/unit
$12/unit

Direct labor
Fixed overhead

$15/unit
$20,000

Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are
purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will
cost $50 to purchase a seat from an outside vendor.
Instructions
(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating
System."
(b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to
produce income of $20,000?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Situation 1
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
Net Income
Reject Order
Accept Order
Increase (Decrease)
Revenues

Value

?

Value

Costs
Net income

Value

?

Value

?

?

?

Response:

(b)

Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.
Response:

Situation 2
(a)

Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,
assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.

Variable mfg. costs
New oven costs
Proceed from
scrapping old oven
Total

Retain Oven
?
Value

Replace Oven
?
Value

Net Income
Increase
(Decrease)
?
?

Value

Value

?

?

?

?

Response:

(b)

Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company
projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss
how that might change your conclusion in (a).

Variable mfg. costs
New oven costs
Proceed from
scrapping old oven
Total

Retain Oven
?

Replace Oven
?

Net Income
Increase
(Decrease)
?

Value

Value

?

Value

Value

?

?

?

?

Response:

Situation 3
(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating
System."
Net Income

Make
?

Buy
Value

(Decrease)
Value

Direct labor

?

Value

Value

Variable mfg. costs

?

Value

Value

Fixed mfg. costs

Value

?

?

Purchase price

Value

?

?

?

?

?

Direct materials

Total annual cost
Response:

(b)

Would your answer in (a) change if the productive capacity released by not making the seats could be used to
produce income of $20,000?

Total annual cost

Make
Value

Buy
Value

Net Income
Increase
(Decrease)
Value

Opportunity cost

Value

Value

Value

?

?

?

Total cost
Response:

After you have completed CD7, consider the following additional questions.
1.
Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and
the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or
reject the special order.
2.

Assume in situation 2, the purchase price of the new oven changed to $100,000. Would this change
the decision to retain or replace the oven?

3.

Assume in situation 3, that the estimated number of seats to be produced changed to 3,500 and the cost to purchase
one seat from an outside supplier changed to $55. Should Current Designs make or buy the seats?