Question

Latin Corporation’s breakeven point in revenues is $1,000,000 and fixed costs is

$400,000

Required:

1) Compute the contribution margin ratio

2) Compute the selling price if variable costs are $12 per unit

3) Suppose 80,000 units are sold, compute the margin of safety

Answer 1

1) Contribution margin ratio:

$CMR=\frac{400000}{1000000}=0.40$

2) Selling price:

If variable costs are $12 per unit then selling price is:

$Q=\frac{VC}{AVC}=\frac{600000}{12}=50000 units$

$P=\frac{400000}{50000}+12=20$

3) Margin of safety:

If 80,000 units are sold then the margin of safety is:

$MOS=\frac{80000-50000}{80000}=0.37$