# Embleton Company estimates that variable costs will be 40% of sales, and fixed costs will total \$975,400. The selling price of the product is \$6.

(a) Compute the following: (Round all answers to 0 decimal places. You will need to round contribution margin to 2 decimal places for computational purposes.)
Breakeven sales in units units

Breakeven sales in dollars \$

(b) Assume actual sales are \$2,368,000
Margin of safety in dollars \$

Margin of safety ratio %

1)

## To solve this problem, we need to understand a few key concepts: variable costs, fixed costs, contribution margin, and breakeven point.

Variable costs are costs that fluctuate proportionally with the level of sales or production. In this case, Embleton Company estimates that variable costs will be 40% of sales. Therefore, the variable cost percentage is 40%.

Fixed costs are costs that do not change based on the level of sales or production. In this case, fixed costs total \$975,400.

Contribution margin is the amount left over from sales revenue after deducting variable costs. It represents the amount available to cover fixed costs and contribute towards profit. To calculate the contribution margin, we subtract the variable cost percentage from 100%:

Contribution margin = 100% - Variable cost percentage
Contribution margin = 100% - 40%
Contribution margin = 60%

Now, let's calculate the breakeven sales in units and dollars.

(a) Breakeven sales in units:

The breakeven point is the level of sales at which the company neither makes a profit nor incurs a loss. At this point, total revenue is equal to total costs.

Breakeven sales in units = Fixed costs / Contribution margin per unit
Breakeven sales in units = \$975,400 / (\$6 - 40% of \$6)

To calculate 40% of \$6, multiply \$6 by 0.40:
Variable cost per unit = \$6 * 0.40 = \$2.40

Breakeven sales in units = \$975,400 / (\$6 - \$2.40)
Breakeven sales in units = \$975,400 / \$3.60
Breakeven sales in units = 271,500 units

Therefore, the breakeven sales in units is 271,500 units.

Breakeven sales in dollars:

To calculate the breakeven sales in dollars, multiply the breakeven sales in units by the selling price per unit.

Breakeven sales in dollars = Breakeven sales in units * Selling price per unit
Breakeven sales in dollars = 271,500 units * \$6
Breakeven sales in dollars = \$1,629,000

Therefore, the breakeven sales in dollars is \$1,629,000.

(b) Assume actual sales are \$2,368,000:

Margin of safety in dollars:

Margin of safety is the difference between actual sales and breakeven sales. It represents the amount of sales a company has above the breakeven point.

Margin of safety in dollars = Actual sales - Breakeven sales in dollars
Margin of safety in dollars = \$2,368,000 - \$1,629,000

Margin of safety in dollars = \$739,000

Therefore, the margin of safety in dollars is \$739,000.

Margin of safety ratio:

Margin of safety ratio is the margin of safety as a percentage of actual sales.

Margin of safety ratio = (Margin of safety in dollars / Actual sales) * 100
Margin of safety ratio = (\$739,000 / \$2,368,000) * 100

Margin of safety ratio = 31.21%

Therefore, the margin of safety ratio is 31.21%.