Chapter 12, Problem 12.5ME

To determine

1.

Concept Introduction:

Break-even point:

The break-even point can be defined as the point where the total sales revenue is equal to the total costs involved. The break-even point is calculated as −

Break-even point (in Units) −

$\text{Break-even point }\left(\text{in Units}\right)\text{=}\frac{\text{Fixed cost}}{\text{Contribution margin per unit}}$

Break-even point (in Dollars) −

$\text{Break-even point (in Dollars)=}\frac{\text{Fixed cost}}{\text{Contribution margin ratio}}$

To calculate:

Bay Area Cycle's break-even point in units and in dollars

To determine

2.

Concept Introduction:

Margin of Safety:

Margin of safety can be defined as the amount of sales revenue over and above the break-even point. The break-even point is the point of sales revenue where totals costs are equal to total revenue. All the sales above break-even point are termed as margin of safety.

The margin of safety is calculated as under −

$\text{Margin of safety = Actual sales – Break-even point of sales}$

To compute: Margin of safety and margin of safety ratio