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. Required Determine the break-even point in units and dollars using each of the following approaches: Use the equation method. Use the contribution margin per unit approach. Prepare a contribution margin income statement for the break-even sales volume.

Answer 1

Answer:

Using equation method we have,

Sales - variable cost = Fixed Cost

Let number of units be X, at break even then,

$150 X - ($60 + $18) X = ($480,000 + $240,000)

$150 X - $78 X = $720,000

$72 X = $720,000

X = $720,000/$72 = 10,000 units.

Using contribution income statement

Contribution margin per unit approach = Selling price - Variable cost = Contribution = $150 - $60 - $18 = $72 per unit

Total fixed cost = Fixed Manufacturing cost  + Fixed Selling & Administrative

= $480,000 + $240,000 = $720,000

Break Even Point = $\frac{Fixed\ Cost}{Contribution\ Per\ Unit}$

= $\frac{720,000}{72} = 10,000$

Contribution margin Income Statement:

Sales value = $150 $\times$ 10,000 = $1,500,000

Less: Variable Cost

Manufacturing = $60 $\times$ 10,000 = ($600,000)

Selling Expense = $18 $\times$ 10,000 = ($180,000)

Contribution Margin = $720,000

Less: Fixed Cost

Fixed Manufacturing Cost = ($480,000)

Fixed Selling Expense = ($240,000)

Profit = $0