Answer to Question 1
A
Answer to Question 2
1.
Selling price 206
Variable costs per unit: 24
Contribution margin per unit (CMU) 182
Breakeven point in units =
Breakeven point in units = = 1,800 returns (units)
Margin of safety (units) = 3,000 1,800 = 1,200 units
618,000 budgeted revenue206 = 3,000 units
Breakeven revenues = 206 1,800 = 370,800
Margin of safety percentage = (618,000370,800) 618,000= 40
2a. Increase selling price to 224
Selling price 224
Variable costs per unit: 24
Contribution margin per unit (CMU) 200
Breakeven point in units =
Breakeven point in units = = 1,638 returns (units)
Breakeven revenues = 224 1,638 units = 366,912
Margin of safety percentage = (618,000 366,912) 618,000 = 40.62
This change will not help Arvin achieve its desired margin of safety of 45.
2b.
Selling price 206
Variable costs per unit: 24
Contribution margin per unit (CMU) 182
Breakeven point in units =
Breakeven point in units = = 1,800 returns (units)
Breakeven revenues = 206 1,800 = 370,800
Budgeted revenues = 618,000 1.15 = 710,700
Margin of safety percentage = (710,700 370,800) 710,700 = 47.8
This change will help Arvin achieve its desired margin of safety of 45.
2c.
Selling price 206
Variable costs per unit 24 2): 22
Contribution margin per unit (CMU) 184
Fixed costs = 327,600 1.05 = 343,980
Breakeven point in units =
Breakeven point in units = = 1,870 returns/units (rounded up)
Breakeven revenues = 206 1,870 units = 385,220
Margin of safety percentage = (618,000 385,220) 618,000= 37.7
This change will not help Arvin achieve its desired margin of safety of 45.
Options 2a and 2b improve the margin of safety, but only option 2b exceeds the company's desired margin of safety. Option 2c actually lowers the company's margin of safety.