CONTRIBUTION MARGIN, CVP, NET INCOME, MARGIN OF SAFETY
Chromatics, Inc., produces novelty nail polishes. Each bottle sells for $3.60. Variable unit costs are as follows:
|
Acrylic base |
$0.75 |
|
Pigments |
0.38 |
|
Other ingredients |
0.35 |
|
Bottle, packing material |
1.15 |
|
Selling commission |
0.25 |
Fixed overhead costs are $12,000 per year. Fixed selling and administrative costs are $6,720 per year. Chromatics sold 35,000 bottles last year.
Required:
1. What is the contribution margin per unit for a bottle of nail polish? What is the contribution margin ratio?
2. How many bottles must be sold to break even? What is the break even sales revenue?
3. What was Chromatics’s operating income last year?
4. What was the margin of safety?
5. Suppose that Chromatics, Inc., raises the price to $4.00 per bottle, but anticipated sales will drop to 30,400 bottles. What will the new break even point in units be? Should Chromatics raise the price? Explain.