Answer:
- (A) Break even will be $19,400,000 or 242,500 units
- (B) Target profit in sales units will be 267,500 units
Explanation:
Break Even Point (dollars) = Fixed Cost / contribution margin ratio
Break Even Point (units) = Fixed Cost / contribution margin per unit
Contribution Margin Unit = Sales Price - Variable Cost = 80 - 60 = 20
Contribution Margin Ratio = Contribution per unit / Sales Price = 20 / 80 = 0.25
Break even will be $19,400,000 or 242,500 units
<u>Remember: </u>
Contribution Margin will be sales minus variable cost
while the ratio is doing the contribution over the sales price
Trget profit (units) = target profit / contribution per unit +BEP =
500,000/20 + 242,500 = 267,500
or (target profit + fixed cost) / contribution margin per unit =
(4,850,000 + 500,000) / 20 = 267.500
<u>Remember:</u>
Target profit always must be higher than BEP (break-even point) If not, either or both are wrong, because in order to make gains, first you need to pay the fixed cost (BEP) so target profit number needs to be higher than that, always.
