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) <u> (900,000)</u>
Contribution margin $300,000
Fixed cost <u> (180,000)</u>
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) <u> (1,800,000)</u>
Contribution margin $600,000
Fixed cost <u> (180,000)</u>
Profit $420,000
Explanation:
1. To compute the Break-even point in units,
Formula is BEP = total fixed cost / unit contribution margin
<em>Step 1. Compute the unit contribution margin</em>
Unit selling price $120
Less : variable cost <u> 90</u>
Unit contribution margin $30
<em>Step 2. compute the unit break-even in units using the formula.</em>
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
<em>Step 1. Compute the contribution margin ratio</em>
Unit selling price $120
Less : variable cost <u> 90</u>
Unit contribution margin $30
So, $30 divided by $120 equals 25% (CMR)
<em>Step 2. compute the unit break-even in dollars using the formula.</em>
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) <u> (900,000)</u>
Contribution margin $300,000
Fixed cost <u> (180,000)</u>
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
<em>Step 1. Compute the unit contribution margin</em>
Unit selling price $120
Less : variable cost <u> 90</u>
Unit contribution margin $30
<em>Step 2. compute the units to sell using the formula.</em>
(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
<em>Step 1. Compute the contribution margin ratio</em>
Unit selling price $120
Less : variable cost <u> 90</u>
Unit contribution margin $30
So, $30 divided by $120 equals 25% (CMR)
<em>Step 2. compute the target sales in dollars using the formula.</em>
(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) <u> (1,800,000)</u>
Contribution margin $600,000
Fixed cost <u> (180,000)</u>
Profit $420,000
