Problem 7-62. Contribution Margin, Cost-Volume-Profit, Margin of Safety

Candy land Inc. produces a particularly rich praline fudge. Each 10-ounce box sells for $5.60. Variable unit costs are as follows:

Pecans $0.70 Sugar 0.35 Butter 1.85 Other ingredients 0.34 Box, packing material 0.76 Selling commission 0.20

Fixed overhead cost is $32,300 per year. Fixed selling and administrative costs are $12,500 per year. Candy land sold 35,000 boxes last year.

Required: (Please show work step by step)

1. What is the contribution margin per unit for a box of praline fudge? What is the contribution margin ratio?

2. How many boxes must be sold to break even? What is the break-even sales revenue?

3. What was Candy land's operating income last year?

4. What was the margin of safety in sales dollars?

5. CONCEPTUAL CONNECTION Suppose that Candyland Inc. raises the price to $6.20 per box but anticipates a sales drop to 31,500 boxes. What will be the new break-even point in units? Should Candyland raise the price? Explain.