Answered

Stuart Company estimates that variable costs will be 60% of sales, and fixed costs will total $800,000. The selling price of the product is $4.

Instructions

APrepare a CVP graph, assuming maximum sales of $3,200,000. (Note: Use $400,000 increments for sales and costs and 100,000 increments for units.)
BCompute the break-even point in

(1) Units and

(2) Dollars.

CCompute the margin of safety in

(1) Dollars and

(2) As a ratio, assuming actual sales are $2.5 million.

Verified Answer :

Koikkara


As per Question,

Break-even unts = $800000 / ($4 x (1 - .60)) = 800000 / (4 x .40) = 500,000 
{note: 60/100= 0.06}

that means....,

Stuart Company  sells 500,000 units @ $4 per = $2,000,000 in sales.
...i.e.., Break-even dolalrs = 4 x 500000 = $2,000,000 

Margin of safety = (2500000 - 2000000) x .40 = $200,000 
....i.e.,Margin of safety ratio = 200000 / 800000 = 25%

Graph: Approximate - not real !

View image Koikkara

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