Draaksh Corporation sells premium quality wine for $50 per bottle. Its direct materials and direct labour costs are $9 and $6 respectively per bottle. It pays its direct labour employees a wage of $12 per hour. The company performed a regression analysis using the past 12 months’ data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base:

y = $148,200 + $16.50x

Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $32,000 per month for sales promotions; additionally, it has decided to offer a sales commission of $2.75 per bottle to its sales personnel. Administrative expenses are expected to be $24,000 per month.

Required:

1. Compute the expected total variable cost per bottle and the expected contribution margin ratio.

2. Compute the annual break-even sales in units and dollars.

3. Draaksh has budgeted sales of $7.5 million for the next fiscal year. What is the company’s margin of safety in dollars and as a percentage of budgeted sales?

4. As the marketing manager of Draaksh, how can you use the information regarding the margin of safety in your planning?