Question

Ramirez Company sells a product for $80 per unit. The variable cost is $60 per unit, and fixed costs are $4,850,000. Determine (A) the break-even point in sales units and (B) the sales units required for the company to achieve a target profit of $500,000.

Answer 1

Answer:

• (A) Break even will be $19,400,000  or 242,500 units
• (B) Target profit in sales units will be 267,500 units

Explanation:

Break Even Point (dollars) = Fixed Cost / contribution margin ratio

Break Even Point (units) = Fixed Cost / contribution margin per unit

Contribution Margin Unit = Sales Price - Variable Cost = 80 - 60 = 20

Contribution Margin Ratio = Contribution per unit / Sales Price = 20 / 80 = 0.25

Break even will be $19,400,000  or 242,500 units

Remember:

Contribution Margin will be sales minus variable cost

while the ratio is doing the contribution over the sales price

Trget profit (units) = target profit  / contribution per unit +BEP =

                                  500,000/20 + 242,500 = 267,500

or      (target profit + fixed cost)   / contribution margin per unit =

                    (4,850,000 + 500,000) / 20  =  267.500

Remember:

Target profit always must be higher than BEP (break-even point) If not, either or both are wrong, because in order to make gains, first you need to pay the fixed cost (BEP) so target profit number needs to be higher than that, always.