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-even point in Sales ( units ) = Fixed Costs Contribution Margin per unit 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: Margin of Safety = Sales − Sales at Break-Even Point Sales To explain: the reason to question the validity of the given data.

Question

Matthew Inc. produces memory enhancement kits for DVR machines. Sales have been very erratic, with some months showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (15,000 units at $25 per unit) $375,000 Variable expenses 300,000 Contribution margin (CM) 75,000 Fixed expenses 100,000 Net operating loss $ (25,000) Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to earn a pretax profit of $10,000?

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Chapter 21, Problem 21.24EX

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-even point in Sales(units) =Fixed CostsContribution Margin per unit

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:

Margin of Safety=Sales−Sales at Break-Even Point Sales

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

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