Farrell Company manufactures a product that sells for $50 per unit. Farrell incurs a variable cost per unit of $30 and $3,400,000 in total fixed costs to produce this product. They are currently selling 200,000 units.

Instructions: Complete each of the following requirements, presenting labeled supporting computations.

(a) Compute and label the contribution margin per unit and contribution margin ratio.

(b) Using the contribution margin per unit, compute the break-even point in units.

(c) Using the contribution margin ratio, compute the break-even point in dollars.

(d) Compute the margin of safety and margin of safety ratio.

(e) Compute the number of units that must be sold in order to generate net income of $400,000 using the contribution margin per unit.

(f) Should Farrell give a commission to its salesmen based on 10% of sales, if it will decrease fixed costs by $400,000 and increase sales volume 10%? Support your answer with labeled computations.

Solution Preview

(a) Compute and label the contribution margin per unit and contribution margin ratio.

Contribution Margin per Unit = Selling Price per unit - Variable cost per unit
Contribution Margin per unit = 50-30 = $20

Contribution margin ratio = Contribution Margin per unit/selling price per unit
contribution margin ratio = 20/50 = 0.4

(b) Using the contribution margin per unit, compute the break-even point in units.

Breakeven point in units = fixed costs/contribution margin per unit
breakeven ...

Solution Summary

The solution explains the calculation of contribution margin, contribution margin ratio and breakeven point.

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