Question

Ritchie Manufacturing Company makes a product that it sells for $150 per unit. The company incurs variable manufacturing costs of $60 per unit. Variable selling expenses are $18 per unit, annual fixed manufacturing costs are $480,000, and fixed selling and administrative costs are $240,000 per year.
Determine the break-even point in units and dollars using the equation method, the contribution margin per unit approach and the contribution margin ratio approach.

a. Break-even point in units
Break-even point in dollars
b. Contribution margin per unit
Break-even point in units
Break-even point in dollars
Prepare a contribution margin income statement for the break-even sales volume.

Answer 1

Answer:

a. Selling price = $150

Variable cost per unit = $60 + $18 = $78

Total fixed cost = $480,000 + $240,000 = $720,000

Fixed cost = BEP (Selling price - Variable cost per unit)

$720,000 = BEP ($150 - $78)

$720,000 = BEP ($72)

BEP = $720,000/$72

BEP (units) = 10,000 units

BEP (dollars) = BEP units x selling price

                        = 10,000 x $150

                        = $1,500,000

b. Contribution margin per unit = Selling price - Variable cost per unit

                                                    = $150 - $78 = $72

c. Contribution margin income statement: $

Total contribution ($72 x 10,000 units)   720,000

Less: Total fixed cost                               720,000

Net profit                                                        0

Explanation:

BEP (units) is equal to fixed cost divided by contribution per unit

BEP (dollars) is equal to break-even point in units x selling price

Contribution per unit is equal to selling price less variable cost per unit