Question

Vault-Tec. has annual fixed costs excluding depreciation of $1,000,000 and variable costs that are 75% of sales. If depreciation was $250,000, what was Vault-Tec's break-even level of sales?

Answer 1

Answer:

Vault-Tec's break-even level of sales ==$3,000,000  

Explanation:

Break-even point is the level of activity at which a firm must operate such that its total revenue will equal its total costs. At this point, the company makes no profit or loss.

It is calculated using this formula:

Break-even point (sales) = Fixed cost/c/s ratio.

c/s means contribution to sales ratio

C/s ratio = (sales - variable cost)/sales

C/S is the proportion of sales value that is earned as contribution. its is sales less variable costs.

So if for an instance, variable costs are 60% of sales, then contribution will be 40% of sales i.e (100-60)% .

Now we can apply these concepts to our questions:

c/s =( 100-75)% = 25%

Break-even point( sales) = (1,000,000- 250,000)/25%

                                         = 750,000/0.25

                                          =$3,000,000

Note that depreciation is excluded from the fixed costs because it is a non-cash flow item.

Vault-Tec's break-even level of sales ==$3,000,000