 Hello and this lecture will continue on the test type problems, the smaller problems that could be in format of multiple choice questions. We have a company has fixed costs of $35,000, a contribution margin of 25%. 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. If expected sales are 200,000, what is the margin of safety as a percentage of sales? So first we're going to think about okay what is the margin of safety? How can we calculate the margin of safety? I'm going to put a colon there we're going to calculate that that's going to be the sales less minus the break even. So that's how we're going to calculate that so do we have the material to do that we have first the 200,000 is going to be the sales the break even we don't have that so we're going to need that that's something that we will need in order to calculate the margin of safety and so that'll be our end calculation so I'll put that'll indent that out there and that is what we are looking for now once we get that then we need to get the percentage and that will just be the margin of safety divided by the sales that's how we're going to get as margin of safety as a percentage of sales so now we got to we got to figure out what the break even will be how we're going to get the break even the break even formula will be will be here it's fixed cost over the contribution margin percent so you can memorize that you can kind of derive that you probably want to have that somewhere handy for you when you're taking test questions and that's going to then eat the fixed cost given to us up here being the 35 i'm going to put a comma thousand i'm going to put alt enter to go underneath and we're going to divide that by 25 percent which is also given in the problem up here as the contribution margin ratio i'm going to go ahead and underline that and hit enter then go back on the cell then we can center it so that's our ratio that we need to do our division problem therefore then we can take this equals the 35 000 just going to calculate this divided by 0.25 25 percent is 0.25 and that will give us the 140 so that's the break even point so 140 so we can plug that in here that equals this 140 we just calculated right there and therefore the margin of safety equals if we think we're going to get 200 000 we say well how much over the break even where we make no profit are we minus the 140 we ever have a 60 000 margin of safety well what's the margin of safety as a percentage of sales then well that's going to equal the 60 000 divided by the 200 000 so that's what that's what a ratio is going to be now it's not zero of course because that means that there's no decimals right here so we're going to go to the home tab numbers and we can increase it's going to be 30 percent or we can just hit this percentage and there we have that so 30 percent so what is the margin of safety as a percentage of sales anytime you see as the percentage of sales it's going to be that ratio is the 60 over the sales in this case next one says that during its most recent fiscal year company had total sales of three million 260 000 contribution margin amount of one million five hundred thirty thousand and pre-tax income of four hundred and forty five thousand what should have been reported as fixed costs in the company's contribution margin income statement for the year in question all right so we're going to do our calculation here this is the kind of cost of volume calculation and we're going to start off with the sales just like we would with an income statement which would be the in this case three million two hundred and sixty thousand but different than a standard income statement we are going to subtract from that variable costs and that will then give us the contribution margin and we don't know the variable cost they didn't give us that but they did give us the contribution margin so we know that the contribution margin happens to be one million five hundred thirty thousand and they didn't ask us for variable cost and we don't really need to figure it out but we might as well because it's there so we we know that the formula for this would then be the three million two hundred sixty thousand minus variable costs kind of like our x fact they the unknown and that should equal this one million five thirty thousand so then if we solve for the variable cost we can see it's going to basically be a subtraction problem right so variable cost then if we solve for this is going to equal this uh three two six oh minus the one five three zero zero zero zero and that should be the variable cost if you could see that right here we could see it's a subtraction problem obviously it's going to be the sales minus the uh the contribution margin and we could double check that by saying okay well does that work if i pull out the calculator here does it work to say that three two six zero minus one seven three zero and i know i left off three zero but same thing yeah that works okay so that's that one and then we're going to say that we're going to take the fixed cost which that's what we're looking for we don't know that and then we have the income before tax it's kind of like net income net income before tax so and they gave us that number so once again we're backing into a number they gave us the 450 thousand so once again we're backing into this number so we subtracted these two to get to here and now we're taking this minus this to get to here we don't know what this is and once again that's going to be a subtraction problem you can kind of see it's a subtraction problem by saying well if it's this minus this gets to that then this must be the difference between this and that if that's unclear then write it down algebraically we can say that it's one million five hundred and thirty thousand minus the four four five oh i'm sorry minus the fixed cost the variable equals put it space the four equals the four four five comma and then if you write it down this way you can see algebraically that that basically it's going to be a subtraction problem because we're going to subtract the one million five thirty from each side so the fixed cost then would equal the four four five zero zero zero minus the one five three zero and there and there we would have that and then we'd have to flip the sign of course so we're going to flip the sign by saying negative of that so i'll let you work the math on that but you can see of course if we plug that in here if we say this is going to equal this number minus this number then that's it and we can double check our work then by pulling out the calculator and saying all right does that work if we take the one five three zero minus the one oh eight five that's going to give us the four forty five so that works so if there's only three numbers you can probably plug something in there and then double check it if it's a obviously it's a subtraction problem in this case next one says that a firm expects to sell twenty five out twenty five six hundred twenty five thousand six hundred units of its product at eighteen dollars per unit pre-tax income is predicted to be sixty thousand six hundred if the variable cost per unit are nine dollars total fixed cost must be what all right so we can we can break this out and put what we know in here once again we're going to take our sales minus our variable cost that'll give us our contribution margin less the fixed cost that's going to give us basically our net income before taxes so on the sales side we're going to start with sales and we have firm expects to sell twenty units so we have units that we're going to have and then the cost per unit so we'll have cost so the units and the cost and then we'll have the total right so we have to do this calculation here so we got twenty five six units they cost eighteen uh i'm sorry and this is cost sales or cost it's going to be one or the other we can go ahead and center those if we would like go on the home tab go into the center and we can make it bold all right so then we got this equals the twenty five six times eighteen so they they have twenty five six units times eighteen that means we're going to have sales of four hundred sixty thousand eight hundred variable costs remember those change in relation to the number of sales that's why we're breaking it out this way rather than a standard um income statement because we can do this kind of estimate estimation this way so we're going to say okay the variable cost for the two five six units is going to be nine dollars nine dollars per unit that's given to us here therefore the variable costs are going to be the twenty five six hundred times nine that's the cost per unit and there we have that and then we're going to say minus that's going to be the contribution margin contribution margin is going to equal the sales price minus the variable cost and that's our contribution margin so i'll put an underline there and then what we do is we subtract out the fixed cost so remember there's only two types of costs we're kind of looking at here breaking them out between variable and fixed fixed cost is the unknown that's what we don't know we're going to go ahead and underline that what they gave us once again is they gave us the end number uh which was to be income so this is pre tax income so we're going to say income is going to be this minus this number but we don't know that number so we can't do that yet and so but they gave us that number it's going to be 60600 so we got to say okay this minus this is going to equal that and obviously again that's going to be a subtraction problem you can kind of see it you can say well if this minus this is going to equal that then i got to subtract it's got to be the difference between this and that you could write that down algebraically 230 400 minus something which in this case is fixed cost that's our unknown equals the 60600 so we can see it algebraically we're solving for fixed cost which means we're going to have to subtract this from each side which will leave us with a negative and then we'll have to remove the negative from each side so i'm just going to do the subtraction problem and just say that fixed cost equals the uh i'm going to do the 200 what would be something like this we can say it's the negative uh to flip the sign of 60600 minus the 230 400 so i took a couple steps in one and there and there's a subtraction problem so we can see it's a subtraction problem here basically we're just going to say it's the 230 400 minus the 60600 and there's no real problem to make an estimate if we're not totally sure because we can just double check it say what was that work 230 400 minus the 169 800 does that equal 60600 it does all right so that looks like it's okay next one says during march firm expects its total sales to be 163 000 its total variable cost to be 95 3 and its total fixed cost to be 25 3 the contribution margin for march is so this is going to be our same calculation we're going to start with sales how do we calculate contribution margin we take the sales first and that's going to be the 163 that gave us that number less variable cost and they actually gave us that number 95 300 and that should give us the contribution margin which is just going to be sales minus the variable cost so all we have to do is basically know the formula that we've been using in order to do that to get to the variable costs note that they gave us some extra information which is going to leave us wondering that you know when we do the problem like why do they give us that extra information but that's what happens sometimes in the multiple choice questions next one says a company company's product sells for 12 dollars and two cents per unit and has a five dollar and three cent per unit variable cost the company's total fixed costs are 97 900 the break even point in units is what so notice was a key factor here is we're looking for the break even in units we've looked for the break even in total sales dollars in this case we're going to calculate the break even in units how many units do we need to produce in order to break even the way we're going to do that is we're going to take the contribution margin per unit and divide it into the fixed cost so let's take a look at that and see if that makes sense we're going to say okay the sales per unit is the 12.02 and the variable cost per unit is 5.03 I'm going to have to add some decimals here obviously so I'm just going to highlight this whole area where my calculations will be going to go to the home tab going to go to the number it's going to add some decimals like so all right so that means that we got the contribution margin per unit so contribution margin per unit is going to be we get we sell them off for 12 dollars and two cents and they cost five dollars and three cents therefore we're walking away after variable costs with six dollars and ninety nine cents per unit that we sell so now we can just figure out well how many units do we have to sell to like pay the fixed cost to like basically pay the rent the rents being one of the major fixed costs right with a real rent doesn't change month to month so how many units after the variable cost do we have to pay to cover this so in order to do that we're going to take the fixed cost of ninety seven nine hundred and divide it by the the contribution margin per unit so that equals this cell which is this six ninety nine we're going to divide those two out so we're going to take the ninety seven nine divided by the six point nine nine six dollars nine nine cents that means we're going to need to sell about fourteen thousand five and obviously note that you know it doesn't divide evenly so that means that we're probably going to have to round up if we want to uh to hit that break even points we'll probably be fourteen thousand six now if you wanted to see the dollar sales you could multiply that times the sales price in this case if they asked for the dollar sales which was 12.02 per unit so this is how many units we need to make times the the sales price and we could then come up with the dollars that would be this times the 12.02 then would be the sales in dollars next one says that a product sale for 260 per unit and its variable cost per unit are 189 the fixed costs are 432 thousand if the firm wants to earn 38,020 pre-tax income how many units must be sold okay so this is going to be similar to the break even in units but now we're just going to add to it the amount of profit that we want to get so first thing we need to do is get the contribution margin per unit so what we're going to do is we're going to take the sales per unit and that's we're going to be the 260 that's how much we sell our items for in this case and then we're going to take the variable cost per unit because those things change in a in a similar way unlike fixed cost and that's going to be our contribution margin per unit so we're going to subtract that out we're going to take the 260 minus the 189 contribution margin per unit now remember it on in terms of the fixed cost the break even in units we just took the fixed cost divided by this that's how much money that we are walking away from after each unit sales so it would make sense then to say well if the rent is whatever the rent is then how many of those units do we got to pay in order to sell in order to just basically pay the fixed cost that we know what's going to happen now the only difference when we're projecting income is that we're going to take the fixed cost which they gave us to be 432,000 and we're going to add to it the income that we want to earn we want to earn pre-tax income we're estimating 38,020 we had to add that 20 on there for some reason so that's probably gonna all right and then that means that if we add those up then we're going to say this is going to be the 432 plus the 38,020 that this is the number then that we need to clear with our 71 units so we need to say how many units do we need to sell in order for the 71 to add up to this 470,020 and that's going to be the contribution margin per unit here is the 71 and then we're just going to divide this out so we're going to divide this out we're going to say this equals the 470,020 divided by the 71 contribution margin per unit would mean that we would need to sell about 6,620 units if we want to know how much dollar revenues would we need in order to make that 38,020 pre-tax net income we can multiply times the sales price we're going to sell those for 260 remember up here and that means that we would need revenue of 6,620 times the 260 of 1,721,200 companies break even point in units is 1,700 the sales price per unit is 12 and the variable cost per unit is 9 if the company sells 3,900 units what is net income so we're going to do our calculation for net income we're going to have our three headers though are going to be the number of units that we have then we're going to have the sales price and the cost per unit and then we're going to have the total over here so this is going to be what we have I'm going to make that bold we can underline it we can center it and we got these sales so the units that we're going to sell they say that we're going to sell in our projection 3,900 units and the sales price per unit 12 so we're going to say the total then would equal the 3,900 times 12 and that would give us the 46,8 then we've got the variable cost this is how we calculate the within this calculation and we're going to say that the variable cost per units are 3,900 units again and the variable costs are 9 therefore we're going to say this equals the 3,9 times the $9 cost per unit and that will give us the total variable cost 35,100 this gives us the contribution margin so contribution margin again 3,900 units and we can get the contribution margin per unit I'm going to go ahead and underline this home tab underline contribution margin per unit would equal the 12 minus the 9 so after each unit we sell we walk away with three dollars and we can calculate this one of two ways we can say we want the 46,8 minus the 35,1 and that'll give us the 11,7 we also could have calculated by saying that we want the 3,9 times the 3 the contribution margin per unit to get the 11,7 now the next thing that we would need are the fixed costs the fixed costs that's what they don't know they didn't give us the fixed costs we don't know what the fixed costs are and and that would give us the ending number here which is going to be net income and net income we do not know as well that's what we're looking for so question how can we back into this fixed cost how can we get that number next calculation that they gave us they gave us that the breakeven point is in units 1,700 so we can take a look at that calculation how do we get the breakeven calculation the breakeven calculation you'll recall is fixed cost so fixed cost and and that's going to be divided by the contribution margin so the contribution margin per unit let's say per unit so we know what that number is that's three and we know that the breakeven point is in units one seven so here we have it we're looking for this fixed cost that's what we're looking for and we and we know that it's going to be this divided by that is one seven this divided by that is one seven therefore if it's a division to get to here it's probably multiplication to get back to there we can verify that by saying well it's going to be fixed cost is going to be divided by three has got to equal the one seven that's our formula and therefore to solve for fixed cost we if a division we have to do the opposite we got to multiply so it would be fixed cost is going to equal the three times one seven so do that again equals three times one seven and that gives us our five one so let's do that one more time it's a division to get from here to here so it's probably multiplication which is going to be three times one seven and there's no real risk in us doing that because we can always just check our work and say well does that work let's see if I took the five one divided by three then we get the one seven so that looks to be correct that now is our fixed cost so now we had to find the fixed cost so that's going to be the five one and now we could finally get to our net income which is going to be where we were before the contribution margin of eleven seven minus the five one so that one was a little tricky to back into a few things there