The PowerClean Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of 40,000 units.Sales revenue$1,600,000Less: Cost of goods sold1,120,000Gross margin$480,000Less: Operating expenses100,000Income$380,000Cost of goods sold consists of $810,000 of variable costs and $310,000 of fixed costs. Operating expenses consist of $30,000 of variable costs and $70,000 of fixed costs.Required: A. Calculate the break-even point in units and sales dollars.B. Calculate the safety margin (in dollars).C. PowerClean received an order for 6,000 units at a price of $25.00. There will be no increase in fixed costs, but variable costs will be reduced by $0.54 per unit because of cheaper packaging. Determine
the projected increase or decrease in profit from the order, assuming there are no opportunity costs.
What will be an ideal response?
A.
| Sales | $1,600,000 |
| Less: Variable costs ($810,000 + $30,000) | 840,000 |
| Contribution margin | $760,000 |
Unit contribution margin: $760,000 ÷ 40,000 units = $19
Break-even point in units: ($310,000 + $70,000) ÷ $19 = 20,000 units
Unit selling price: $1,600,000 ÷ 40,000 units = $40
Break-even point in dollars: 20,000 units × $40 = $800,000
B. Safety margin: $1,600,000 - $800,000 = $800,000
C.
| Sales (6,000 × $25) | $150,000 |
| Less: Variable costs at $20.46* | 122,760 |
| Increase in profit | $27,240 |
* ($810,000 + $30,000) ÷ 40,000 units = $21.00; $21.00 - $0.54 = $20.46
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