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Social Science Clinic => Accounting => Topic started by: Lobcity on Mar 6, 2021

Title: Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs ...
Post by: Lobcity on Mar 6, 2021

Question 1

In 2017, Craylon Company has sales of $1,000,000, variable costs of $250,000, and fixed costs of $200,000. In 2018, the company expects annual property taxes to decrease by $15,000.

Required:

a.	Calculate operating income and the breakeven point for 2017.

b.	Calculate the breakeven point for 2018.

Question 2

Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs total $475,000.

Required:

a.	What is the contribution margin per tire?

b.	What is the breakeven point in tires?

c.	How many tires must be sold to earn a pretax income of $450,000?

d.	What is the margin of safety, assuming 33,000 tires are sold?

Title: Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs ...
Post by: kxciann on Mar 6, 2021

Answer 1

a.  In 2017, operating income is $1,000,000 sales revenue − $250,000 variable costs − $200,000 fixed costs = $550,000.

 The breakeven point for 2017 is $266,667 in total sales dollars.
 Contribution margin ratio = ($1,000,000 - $250,000) / $1,000,000 = 0.75. 
 Breakeven sales = $200,000 / 0.75 = $266,667.

b.	The breakeven point for 2018 is $246,667 in total sales dollars.

Estimated fixed costs for 2018 = $200,000 − $15,000 = $185,000. 
Breakeven sales = $185,000 total fixed costs / 75% CM ratio = $246,667.

Answer 2

a.	Contribution margin per tire = $110 - $85 = $25

b.	N = Breakeven point in tires

 $110N - $85N - $475,000 = 0
 $25N - $475,000 = 0
 N = $475,000/$25 = 19,000 tires

c.	N = Target sales in tires

 $110N - $85N - $450,000 -$ 475,000 = 0
 $25N - $925,000 = 0
 N = $925,000/$25 = 37,000 tires

d.

Margin of safety

= Sales - Breakeven sales

 = ($110 × 33,000) - ($110 × 19,000) = $1,540,000