Question

For the current year ending January 31, Ringo Company expects fixed costs of $178, 500 and a unit variable cost of $41.50. For the coming year, a new wage contract will increase the unit variable cost to $45. The selling price of $50 per unit is expected to remain the same. Compute the break-even sales (in units) for the current year. Compute the anticipated break-even sales (in units) for the coming year, assuming the new wage contract is signed.

Answer 1

Answer:

The break-even sales (in units u) for the current year is 210,000 units.

The anticipated break-even sales (in units t) for the coming year, assuming the new wage contract is signed is 357,000 units.

Explanation:

The BEP which is the break even point is the point where the company's sales or revenue generated is equal to the cost incurred. As such, the BEP is the number of units that must be sold for the company to make neither a profit nor a loss.

Both sales and variable cost are dependent on the number of units sold.

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

The break-even sales (in units u) for the current year

50u - 41.5u - 1785000 = 0

8.5u = 1785000

u = 1785000/8.5

= 210,000 units

The anticipated break-even sales (in units t) for the coming year, assuming the new wage contract is signed

50u - 45u - 1785000 = 0

5u = 1785000

u = 1785000/5

= 357,000 units