Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 30

CVP and Margin of Safety

Rainbow Tours gives walking tours of Springfield. Rainbow charges $40 per person for the tour and incurs $16 in variable costs for labor, drinks, and maps. The monthly fixed costs for Rainbow Tours are $3,600.

Required

a. How many tours must Rainbow sell every month to break even?

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b. Rainbow Tours’s owner believes that 175 people a month will sign up for the walking tour. What is the margin of safety in terms of the number of people signing up for the tour?

Step 1 of 2

a.

Calculation of the number of tours to be sold to break-even

Rain Tours charges $40 per person for the tour and incurs $16 in variable costs for labor, drinks and maps. The monthly fixed costs are $3,600.

Break-even point is the level at which the sales revenue and total costs (variable costs and fixed costs) become equal. There is no profit or no loss at break-even point sales.

Break-even point (Tours) can be calculated using the following equation

Break-even point (Tours)

Contribution margin is the profit earned before adjusting for the fixed costs.

Now, calculate the break-even point as follows: