 Hello in this lecture we're going to work some smaller test type questions which will be basically the size of what a multiple choice question can be but we will not be looking at the multiple choice answers we'll just be looking at the size of a problem that could fit into that format. First one says if a firm forecast sales of 244,000 and its break even support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it are 187 the margin of safety in dollars will be what so if we're talking about the break even what we need to know here of course is what is the break even point what is the margin of safety break even point in dollars means how many units how many dollars of sales do we need to have in order to not have income or loss but to break even so that point is going to be the 244,000 I'm sorry that point is going to be the 187,000 that's where that's how much sales we need to have in order not to have income not have a loss if we're estimated or projecting ourselves to actually be 244,000 it might be useful for us to think okay what's the marginal unit of safety margin of safety being the amounts over the break even point so we'd say oh worst case you know if we have the 244 is what we're projecting to make in sales that's a margin of safety over the bare minimum that we want to do in order to be making money at least at the bare minimum and that gives us a margin of safety of 57,000 during a recent fiscal year company reported pre-tax income of 128,000 a contribution margin ratio of 25% and total contribution margin of 430,000 total variable cost must have been what so we're looking for variable costs so we're going to write out our calculation here and it's kind of like an income statement but it's on a cost volume basis rather than on basically a way a normal income statement would be so rather than revenue minus expenses we're going to calculate the contribution margin by having sales which we don't know they didn't give us sales less the variable costs which is what we're looking for so they didn't give us that of course either which is kind of disturbing we would like to have one of two of those but that's okay and then we're gonna have the contribution margin they did give us that so we know that sales minus the variable cost is going to give us the contribution margin which they gave us to be 430,000 so we can underline that that's going to be the 430,000 now they also gave us the contribution margin percent I usually put that over here next to it so it's 0.25 I'm going to put my cursor back on there I'm going to add decimals home tab numbers add decimals or we could just make it a percent make it a percent and then we have some added information this is all we really need to figure out this variable cost but the thing with multiple choice questions they often give us added information if we were to complete this we would then say less fixed costs which we don't know and that would give us the pre-tax income basically net income before taxes pre-tax income which we do know to be 128,000 but it's not useful to us we really only need this information here in order to solve for this item there so how are we gonna we need to back into this number of course multiple choice questions often have us back into numbers and so we're gonna back into this and we know that well if I knew sales then I know that I can kind of back into this number because sales minus this would equal that and so how could I get to sales possibly well we can think about the contribution margin calculation the percent calculation for contribution margin percent is contribution margin divided by sales so let's write that out because we have three two of the three variables there and therefore we can solve for what sales should be so the contribution margin percent that 25 percent is calculated as equal to the contribution margin the 430 divided by sales which we don't know so let's plug that in again and we're going to say what do we know we know what the 0.25 is here I'm going to bake that a percentage again we know that that equals and I'll type this in here so you can see how I'm formatting this this time the contribution margin we know that's the 430 so I'm going to actually type it in the 430 I'm going to put the comma and then I'm going to select alt and enter and that'll go underneath in the same cell and then we know we're going to divide by sales that's the unknown so I'm just going to put sales that we could put x and I'm going to highlight the top and I'm going to underline it to show that it's a ratio and then we could center this if we wanted to do that to make it look nice we don't have to make it look nice obviously for just calculation purposes but there we have it and again this is something might be good to write out by hand and then we know that the sales over here if we're going to solve for sales now we could see that this is basically a cross multiplication problem by saying that we can put anything over one and we could say okay that's going to be underlined and if we look at it this way because anything over one is itself so I didn't change anything on this side it's still 25 percent because 25 divided by one is 25 percent but we can now maybe more easily see that we can cross multiply 25 times sales and one times 430 so that would give us this formula we would say then it would be sales times 25 percent is going to be equal to the 430 times one cross multiplying which will just give us the 430 thousand and then if we're going to solve for sales we can divide each side by 0.25 to get rid of it so it's a multiplication problem that we need to do the opposite to get rid of it so it's just going to be sales then equals and we're going to say this is equal to the 430 thousand divided by 0.25 and that will give us the sales of 1,720 so now we got sales of 1,720 and now the only question is well what does sales have to be uh sales minus what equals this so we've got our our next calculation of sales less x the variable cost we just say variable cost is going to equal the 430 thousand let me put a comma there and so then we got to then we have to say well sales is going to be we can plug in what sales is obviously is 1,720 thousand so we can then solve for the variable cost and we can basically see it's going to be a subtraction problem so we're going to go ahead and do i'll just do the subtraction problem here it's going to be the 1,720 minus the 430 thousand and that'll give us the 1,290 and then if we double check this calculation here then we can say okay well does that make sense does it make sense that if sales is 1,720 minus 1,290 thousand does that give us the 430 it does so that makes sense we can also check that okay what about the 430 thousand divided by the sales number of 1,720 does that work out and it's 25 percent or 0.25 so that works next one says we're going to use the following information to determine the break even point in dollars and we have the sale the dollar sales the fixed costs and the variable cost so first we need to know what is going to be the break even point formula in dollars let's say and we're going to say that's going to be equal to the fixed cost let's say fixed cost over the contribution margin percent and i'll let you you can kind of derive that but if you just know this formula you'll be able to work problems such as this i'm going to go ahead and center that and i'll put this like kind of in the middle there so we're looking for that so we first we need to find i'm going to look for this contribution margin percent we've got the information to do that we can figure out the contribution margin and then the contribution margin percent so we know that sales total sales in dollars uh were this 580 thousand we know that variable costs are going to be this 2175 so that means that the contribution margin total contribution margin then is going to be sales minus the variable portion sales minus the variable portion it's going to be an important number because again the relationship between sales and variable costs is similar in that they change in a similar way so there we have the the 362 000 then we can figure out the contribution margin percent and that's calculated as the percent uh the contribution margin divided by sales contribution margin divided by sales it's not one why because we need to account for the decimal so we're going to go to the home tab and go to the numbers and we could increase the number of decimals now notice we usually make it to two places but if i check and say okay there's another place out there and if i keep going it goes out to three places so note that if i make it a percentage it goes back to 63 rounding and then if i put one more it's really 62.5 so that's really what it is if we calculate that so if you put in 63 and you're off by a bit then you might want to try 62.5 and vice versa so if we put this into our formula then we have the fixed cost of 214 000 and we're going to say that is alt enter over 62.5 percent i'm going to go ahead and underline this and so we can center this out i'm actually going to pull this over here i'll pull this over here i'm going to center it and so this we're just plugging the numbers now into our equation so there's our equation and that's going to be equal to then if we did that calculation this equals 214 000 divided by 0.625 and that'll give us our 342.4 so the 342.4 then is the breakeven point in dollars than the number of sales the dollars in sales we would need in order to cover total cost both variable cost and the fixed cost