Stan Todd, Inc. wants to manufacture a new cell phone that can be worn on the wrist. Information from doing market research shows that he can sell this phone for $25 each
His fixed costs would be $145,000 a year and variable costs would amount to $10 per phone.
(1) What would the contribution margin ratio be?
(2) What sales volume in units would Stan need to break-even?
(3) What sales volume in units would Stan need to earn $200,000 profit?
(4) What would be the margin of safety if he sold 25,000 units (use the information calculated in #2)?
What will be an ideal response?
1) 60%
(2) 9,667 units
(3) 23,000 units
(4) $383,325
Feedback: (1) $25 - $10 = $15; $15/$25 or 60%
(2) Break-even = $145,000/$15 = 9,667 units
(3) To earn a profit of $200,000 ($200,000 + $145,000)/$15 = 23,000 units
(4) 25,000 × $25 = $625,000
$625,000 - ($25 × 9,667) = $383,325
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