Could some take a look at this problem... I am stuck on a couple areas (red notes)?
Breakeven analysis, target profit and margin of safety problem:

Sally’s Stitches manufactures and sells swimsuits for $40 each. The estimated income statement for 2005 is:

Sales $2,000,000
Variable costs 1,100,000
Contribution margin 900,000
Fixed costs 765,000
Pretax profit $ 135,000

A. Compute the contribution margin per swimsuit and number of swimsuits that need to be sold to breakeven.
B. What is the margin of safety in the number of swimsuits?
C. If the margin of safety was 5,000 in 2004 is the operation more or less risky in 2005 as compared to 2004? Explain
D. Compute the contribution margin ratio and the breakeven point in revenue.
E. What is the margin of safety in revenues?
F. If the next year’s revenue estimate is 200,000 higher. What would the estimated pretax profit?
G. If there was a tax rate of 30% how many costumes need to be sold to earn the after tax profit of $180,000?


A)
Estimated Income Statement Per Unit Price
Sales $ 2,000,000 $40
Variable Cost 1,100,000 $22
Contribution margin $ 900,000 $18
Fixed Cost 765,000
Pretax profit $ 135,000

Breakeven: Fixed Cost + $0 Profit = $765, 000 = 42,500 swimsuits
Price – Variable Cost $40-22

Breakeven is Zero Profit. Revenue covers all fixed and variable costs.



B) Margin of Safety is any sales over 42,500 will result in profit. Any sales below will result in a loss.


C) If the margin of safety was 5,000 swimsuits in 2004 the operation would less risky in 2005. ??????? I am confused????????? I did the following work????
Computation at 5,000 swimsuits:

$18 contribution margin
x 5000 swimsuits
$90,000
- $765,000 fixed cost
$675,000 loss

Breakeven:
$18 contribution margin
x 42,500 swimsuits
$765,000
-$765,000 fixed cost
0 Zero ProfitD) Contribution Margin Ration Calculation:

Fixed Cost + $0 Profit where CMR = Price – Variable Cost = $40-$22 = .45
CMR Price $40


Breakeven point in Revenue Calculation:

$765,000 + $0 Profit = $1,700,000
.45

E) The Margin of Safety in Revenues would be sales in excess of $1,700,000.


F) ?????????? This seems too simplified????? What am I missing?
Estimated Income Statement Revenue Est + $200,0000
Sales $ 2,000,000 $ 2,200,000 ($40x55,000)
Variable Cost 1,100,000 1,210,000 ($22x55,000)
Contribution margin $ 900,000 $ 990,000
Fixed Cost 765,000 765,000
Pretax profit $ 135,000 $ 225,000



G) After tax Profit = 180,000 = $257,143
1- Tax rate 1-.30

Fixed Cost + $0 Profit = $765,000 + $257,143 = 1,022,143 = 56,786
Price – Variable Cost $40-$22 $18 swimsuits

I'm sure this is already past due (I haven't been on here quite as much), so this may not be useful for the homework, but maybe will help out for a test? If you haven't taken the test, there is much here to be learned. If you've already had the test, you can just ignore me. :p (Though you may need some of these concepts for a future chapter, so maybe not a bad idea to go through it anyway.)


A better way to think of it is that contribution margin just covers fixed costs. Revenues will always cover variable, by definition of variable costs. So it's the contribution margin you're more interested in for the sake of break even. Contribution margin contributes to fixed costs and any profit.

Be careful of instructions - it asks for contribution margin. You have the info there (40-22) but didn't put the answer.



You didn't answer the question. Base it on 2005 information that is given. You have sales of 2,000,000 and the selling price is $40 per unit. How many units is that? (On CVP stuff, just get in the habit of dividing things down or multiplying things out to get per unit amounts, or total amounts, etc. You'll end up needing many of them. Like I already had the answers to C & D before it asked.) Margin of safety is the amount actual sold (or estimated to be sold) less the break even. Generally they want this in dollar amount, but your problem wants it in units. So how many units is $2 million?

You are very much complicating something that is fairly simple. The profit/loss is not relevant to the question. (If there were a loss, margin of safety would just be negative. Are you not the one who asked about that before?) The margin of safety of 5000 is not the total units sold - it's the amount of units sold above and beyond break even. i.e. 42,500 + 5000. But you don't even need to know that.

If you will answer B, you will see that doing C is easy. But give B a shot first. Also keep in mind that you cannot do a margin of safety without using a specific year - either a budget for the year, or actual for the year. The only year you have available is 2005. You didn't sell 5000 units in 2005 and revenues weren't $90,000 - they were $2,000,000 as already given in the problem.

(Hint here: don't "grab numbers." Look over your information, see what you have, keep your mind on what you have - write everything down and LABEL it. Always look at your info when you go to figure stuff out. Don't change things given in the problem. Cost accounting requires keeping careful track of what's going on.)

Correct. Though you are again making it more complicated. 18/40 = .45, or 900,000/2,000,000 = .45. Same percent regardless, but you only need do the one division. The break even info is unnecessary and irrelevant. (Contribution margin ratio is what it is, regardless of whether you break even or not.)


No, it really is that simple. It's the sales in excess of 1,700,000. If your sales are 2,000,000, how much in excess of 1,700,000? That's it. Really.

What happened to F? (Hint: use your contribution margin ratio and remember that fixed stays the same.)


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Correct. So you got the hardest one right...

People who get the hard stuff and miss the easy stuff generally have a tendency to want to make everything difficult even when it is not. Does this describe you by chance?