Question

Perez Company reported the following data regarding the product it sells: Sales price $ 56 Contribution margin ratio 25 % Fixed costs $ 350,000 Required Use the contribution margin ratio approach and consider each requirement separately. What is the break-even point in dollars? In units? To obtain a profit of $42,000, what must the sales be in dollars? In units? If the sales price increases to $70 and variable costs do not change, what is the new break-even point in dollars? In units?

Answer 1

Answer:

Contribution margin ratio = 1 - variable cost ratio

                                          = 25%

(a) $Break\ even\ in\ dollars=\frac{fixed\ costs}{contribution\ margin}$

$Break\ even\ in\ dollars=\frac{350,000}{0.25}$

                                            = 1,400,000

 $Break\ even\ in\ units=\frac{Break\ even\ in\ dollars}{sales\ price}$

 $Break\ even\ in\ units=\frac{1,400,000}{56}$

                                           = 25,000

(b) For profit of $42,000,

$sales=\frac{Profit+fixed\ cost}{contribution\ margin\ ratio}$

$sales=\frac{42,000+350,000}{0.25}$

               = 1,568,000

$In\ units=\frac{sales}{sales\ price}$

$In\ units=\frac{1,568,000}{56}$

                    = 28,000

(c) variable cost = sales price × variable cost ratio

                           = $56 × 75%

                           = $42

New contribution margin = $\frac{New\ sales\ price-variable\ cost}{New\ sales\ price}$

New contribution margin = $\frac{70-42}{70}$

                                          = 0.4

                                          = 40%

$New\ Break\ even\ in\ dollars=\frac{fixed\ costs}{contribution\ margin}$

$New\ Break\ even\ in\ dollars=\frac{350,000}{0.4}$

                                                        = $875,000

$New\ Break\ even\ in\ units=\frac{New\ Break\ even\ in\ dollars}{New\ sales\ price}$

$New\ Break\ even\ in\ units=\frac{875,000}{70}$

                                                    = 12,500