Question

EB5.

Answer 1

Answer:

1. Break-even in units is 6,000 units

2. Break-even in dollars is $720,000

3. Contribution Income Statement for 10,000 units

Sales revenue (10,000 x 120)    $1,200,000

Variable cost   (10,000 x 90)       (900,000)

Contribution margin                    $300,000

Fixed cost                                     (180,000)

Profit                                              $120,000

4. Units to sell is 16,000

5. Dollars sale is $1,920,000

6. Contribution Income Statement for $2,400,000 sales revenue

Sales revenue (20,000 x 120)    $2,400,000

Variable cost   (120,000 x 90)     (1,800,000)

Contribution margin                       $600,000

Fixed cost                                       (180,000)

Profit                                              $420,000

Explanation:

1. To compute the Break-even point in units,

Formula is BEP = total fixed cost / unit contribution margin

 Step 1. Compute the unit contribution margin

Unit selling price              $120

Less : variable cost             90

Unit contribution margin   $30

  Step 2. compute the unit break-even in units using the formula.

BEP = total fixed cost / unit contribution margin

BEP = $180,000 / 30

BEP = 6,000 units

2. To compute the Break-even point in dollars,

Formula is BES = total fixed cost / contribution margin ratio

 Step 1. Compute the contribution margin ratio

Unit selling price              $120

Less : variable cost             90

Unit contribution margin   $30

So, $30 divided by $120 equals 25% (CMR)

  Step 2. compute the unit break-even in dollars using the formula.

BEP = total fixed cost / contribution margin ratio

BEP = $180,000 / 25%

BEP = $720,000

3. To prepare the contribution margin income statement, we will multiply the units sold of 10,000 units by $120 to get the sales revenue. Then multiply 10,000 units by $90 to get the variable cost. Further illustration below;

Sales revenue (10,000 x 120)    $1,200,000

Variable cost   (10,000 x 90)       (900,000)

Contribution margin                    $300,000

Fixed cost                                     (180,000)

Profit                                              $120,000

4. To compute the units to sell to realize the target profit we will use the formula:

(Total fixed cost +  Target profit )/ unit contribution margin

 Step 1. Compute the unit contribution margin

Unit selling price              $120

Less : variable cost             90

Unit contribution margin   $30

  Step 2. compute the units to sell using the formula.

(Total fixed cost + target profit) / unit contribution margin

($180,000  + $300,000) / 30

Answer is 16,000 units

5. To compute the sales in dollars to realize the target profit of $300,000,

Formula is (Total fixed cost + target profit) / contribution margin ratio

 Step 1. Compute the contribution margin ratio

Unit selling price              $120

Less : variable cost             90

Unit contribution margin   $30

So, $30 divided by $120 equals 25% (CMR)

  Step 2. compute the target sales in dollars using the formula.

(Total fixed cost + target profit) / contribution margin ratio

($180,000 + $300,000) / 25%

$480,000 / 25%

Answer is $1,920,000

6. Contribution Income Statement for $2,400,000 sales revenue. FIRST we must determine how many unit are sold to have that sales revenue. $2,400,000 sales revenue divided by unit selling price equals 20,000 units. To further illustrate, see presentation below.

$2,400,000 / $120 = 20,000 units

Sales revenue (20,000 x 120)    $2,400,000

Variable cost   (120,000 x 90)     (1,800,000)

Contribution margin                       $600,000

Fixed cost                                       (180,000)

Profit                                              $420,000