Question

Sweet manufacturing is planning to sell 400,000 hammers for $6 per unit. the contribution margin ratio is 20%. if sweet will break even at this level of sales, what are the fixed costs?

Answer 1

At the break-even point, the total sales and the total cost is said to be equal. Therefore, there is no profit or loss. We set up the equation as follows:

Profit/Loss = (Unit Contribution Margin) (Units) - (Fixed Costs) = 0

Unit contribution margin is (0.20)(1.50) = 0.30

Substituting the known values gives;

0 = (0.30)(400,000) - FC

FC = (0.30)(400,000)

FC = $120,000

Therefore, the total fixed costs would $120,000.