Chapter 05s-1

# Suppose rbc wants to know how many bikes must be sold

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Suppose RBC wants to know how many bikes  must be sold to break-even                 (earn a  target profit of \$0).  Profits are zero at the break-even point.

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5-40 Break-even in Unit Sales: Equation Method \$0  =  \$200  ×  Q  +  \$80,000 \$200  ×  Q = \$80,000 Q  =   400  bikes Profits  =  Unit CM  ×  Q – Fixed expenses
5-41 Break-even in Unit Sales: Formula Method Let’s apply the formula method to solve for the break-even point. Unit sales =   400 \$80,000 \$200 Unit sales = Fixed expenses CM per unit = Unit sales to break even

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5-42 Break-even in Dollar Sales: Equation Method Suppose Racing Bicycle wants to compute the  sales dollars required to break-even (earn a  target profit of \$0). Let’s use the equation  method to solve this problem. Profit  =  CM ratio  ×  Sales – Fixed expenses Solve for the unknown “Sales.”
5-43 Break-even in Dollar Sales: Equation Method Profit  =  CM ratio  ×   Sales  – Fixed expenses \$ 0  =  40%  ×  Sales – \$80,000 40%  ×  Sales =  \$80,000 Sales = \$80,000  ÷  40% Sales =  \$200,000

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5-44 Break-even in Dollar Sales: Formula Method Now, let’s use the formula method to calculate the  dollar sales at the break-even point. Dollar sales =   \$200,000 \$80,000 40% Dollar sales = Fixed expenses CM ratio = Dollar sales to break even
5-45 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is \$1.49 and the average variable expense per cup is \$0.36. The average fixed expense per month is \$1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars? a. \$1,300 b. \$1,715 c. \$1,788 d. \$3,129

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5-46 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is \$1.49 and the average variable expense per cup is \$0.36. The average fixed expense per month is \$1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units? a. 872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups
5-47 The Margin of Safety in Dollars The margin of safety in dollars is the excess of budgeted (or actual) sales over the break- even volume of sales. Margin of safety in dollars = Total sales - Break-even sales Let’s look at Racing Bicycle Company and  determine the margin of safety.

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5-48 The Margin of Safety in Dollars If we assume that RBC has actual sales of \$250,000, given that we have already determined the break-even sales to be \$200,000, the margin of safety is \$50,000 as shown. Break-even sales 400 units Actual sales 500 units Sales 200,000 \$ 250,000 \$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income - \$ 20,000 \$
5-49 The Margin of Safety Percentage RBC’s margin of safety can be expressed as 20% of sales.

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