McCoy Enterprises makes calculators that sell for $20 each. For the coming year, management expects fixed costs to total $220,000 and variable cost to be $9 per unit.


a. Compute break-even point in units.
b. Compute break-even point in dollars using the Contribution margin (CM) ratio.
c. Compute the margin of safety percentage assuming actual sales are $500,000.
d. Compute the sales required in dollars to earn net income of $165,000.

Part A: 20-9 = 11 ; 220,000/11 = 20,000

Part B: 20-9 = 11 ; 11/20 = .55 ; 220,000/.55 = 400,000

Part C: 220000/500,000 = .44 ; 44%

Part D: 220000-1650000 = 55000

I would like to see if you can help me with these problems but I have did this so far to each problem and not sure if they are correct. Thanks.

Your first two are on the money... nice job!

For (c), you should first determine your "safety sales" (don't look for that one in your book; I made it up), which is the excess of the actual sales (given in question C) over the breakeven sales (which you calculated in B). Now divide your "safety sales" by the actual sales. That's your answer for (c), but before you move on, think a moment about what this particular percentage tells you (it's the percentage of your actual sales which are above the breakeven point), and hence why it's called the "margin of safety percentage".

The computation for (d) is just like the one for (b), with the one exception that the numerator in the final fraction, instead of being just total fixed costs, should be the sum (total fixed costs + the target net income). After you've made that computation, check your answer! See if the net income will indeed be 165K at the sales level you've computed for this question (d).