A company manufactures shoes at a material cost of $0.85 per pair, labour cost of $0.96 per pair, additional variable cost amount to 0.32 per pair and fixed cost is $70500. If each pair sells for $2.63, how many pairs must be sold to breakeven? What is the margin of safety if budged sales is at $170000?
Question
A company manufactures shoes at a material cost of 0.96 per pair, additional variable cost amount to 0.32 per pair and fixed cost is 2.63, how many pairs must be sold to breakeven? What is the margin of safety if budged sales is at $170000?
Solution
To solve this problem, we first need to calculate the total variable cost per pair of shoes and the contribution margin per pair. Then, we can calculate the breakeven point in units (pairs of shoes). Finally, we can calculate the margin of safety.
Step 1: Calculate the total variable cost per pair of shoes The total variable cost per pair of shoes is the sum of the material cost, labour cost, and additional variable cost.
Total Variable Cost = Material Cost + Labour Cost + Additional Variable Cost Total Variable Cost = 0.96 + 2.13
Step 2: Calculate the contribution margin per pair The contribution margin per pair is the selling price per pair minus the total variable cost per pair.
Contribution Margin = Selling Price - Total Variable Cost Contribution Margin = 2.13 = $0.50
Step 3: Calculate the breakeven point in units The breakeven point in units is the fixed cost divided by the contribution margin per pair.
Breakeven Point in Units = Fixed Cost / Contribution Margin Breakeven Point in Units = 0.50 = 141,000 pairs
So, the company must sell 141,000 pairs of shoes to breakeven.
Step 4: Calculate the margin of safety The margin of safety is the budgeted sales minus the breakeven sales, divided by the budgeted sales, all multiplied by 100 to get a percentage.
First, we need to convert the budgeted sales from dollars to pairs of shoes.
Budgeted Sales in Units = Budgeted Sales in Dollars / Selling Price Budgeted Sales in Units = 2.63 = 64,638 pairs
Then, we can calculate the margin of safety.
Margin of Safety = (Budgeted Sales in Units - Breakeven Point in Units) / Budgeted Sales in Units * 100 Margin of Safety = (64,638 pairs - 141,000 pairs) / 64,638 pairs * 100 = -118.24%
The negative margin of safety indicates that the budgeted sales are below the breakeven point, meaning the company would incur a loss at the budgeted sales level.
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