Reference no: EM132529041

You are the owner-manager of University Backpacks, a company that you started this year (20XI). The company sells backpacks to students attending several local colleges in the area. Your company sells two types of backpacks: those for transporting laptop computers and smaller ones not intended for laptop storage. The latter type comes in two styles, with dividers and zippered pockets and without. All backpacks carry the unique logos of the colleges in the community. For this right, University Backpacks pays a licensing fee on a percentage-of-sales basis. You order only enough inventory to meet immediate sales, so there is no inventory at year end. Few alterations or adjustments are made to the backpacks received from your wholesaler. However, in addition to affixing the local college emblems, customers sometimes request special stitching or the addition of extra patches to meet their own unique tastes.

During its first year of business, University Backpacks sold 3,800 backpacks (almost evenly split between laptop and non-laptop styles) and reported the following operating results:

Sales $152,000

Cost of sales $113,256

Gross profit $38,744

Expenses:

Advertising $5,000

Licensing Fee 6,200

Depreciation 2,500

Insurance 2,700

Misc 1,688

Payroll taxes (on owners salary) 2,000

Owners salary 20,000

Storage 1,000

Incomes taxes (refund) (2,503)

Telephone 2,500

Travel and entertainment 3,500

Total expenses 44,595

Net Loss ($5,841)

1. Review the above income statement (prepared in accordance with generally accepted accounting principles) and determine which costs are fixed and which are variable.

2. Using the information provided above and in the income statement, answer the following questions:

Question a. What is the contribution margin per unit?

Question b. What is the breakeven point in units?

Question c. What is the contribution margin ratio?

Question d. What is the breakeven point in sales dollars?

Question e. How many units must be sold to produce a target profit of $25,000?

Question f. How many dollars of sales must be generated to produce a target profit of $25,000?

Question g. What is the margin of safety with a target profit of $25,000?