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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Break-even and margin of safety relationships

At a recent staff meeting, the management of Boost Technologies Inc. was considering discontinuing the Rocket Man line of electronic games from the product line. The chief financial analyst reported the following current monthly data for the Rocket Man:

Units of sales 420,000
Break even units 472,500
Margin of safety in units 29,400

For what reason would you question the validity of these data?

To determine

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

Margin of Safety: It is a measure that shows the probability of decrease in the sales level before a company faces an operating loss or reaches its break-even point. It is expressed in terms of dollars of sales, unit of sales, and percent of current sales. The formula to calculate the margin of safety as a percent of current sales is as follows:

 MarginofSafety=SalesSalesatBreak-EvenPointSales

To explain: the reason to question the validity of the given data.

Explanation

Margin of safety represents the number of units sold in excess of the break-even point.

As given, the unit of sales is 420,000, break-even units is $472,500, and the margin of safety is 29,400. The given data is invalid...

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