Aloha Bags, Inc. produces student book bags that sell for $20 each. For the coming year, management expects fixed costs to be $225,000. Variable costs are $14 per unit. Required:
a. Compute break-even sales in dollars using the mathematical equation.
b. Compute break-even sales using the contribution margin ratio.
c. Compute margin of safety ratio assuming actual sales are $1,200,000.
d. Compute the sales required to earn net income of $150,000, using the mathematical equation.

Solution :

a). At the break even units, the total contribution margin = fixed expenses

  We know that : (Selling price - variable cost) x units sold = fixed expenses  

    i.e.  (20-14)x = 225,000

                  6x   = 225,000

                    x = 37,500

Therefore, the number of units sold, x = 37,500

So, the break even analysis = 37,500 x 20

                                              = 750,000

b).

                                             = 30%

    The Breakeven sales =

                                         = 750,000

c).

                                        = 37.5%

d). Units needed :

       units

Therefore, the sales required = 62,500 x 20

                                                 = 125,000  

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