Question

In 2019, Ivanhoe Company had a break-even point of $385,000 based on a selling price of $7 per unit and fixed costs of $115,500. In 2020, the selling price and the variable costs per unit did not change, but the break-even point increased to $454,000.
Required:
a. Compute the variable costs per unit and the contribution margin ratio for 2019.
b. Compute the increase in fixed costs for 2020.

Answer 1

Answer:

Results are below.

Explanation:

Giving the following information:

2019:

Break-even point= $385,000

Selling price= $7

Fixed costs= $115,500

2020:

Break-even point= $454,000

First, we need to calculate the contribution margin ratio for 2019. We will use the following formula:

Break-even point (dollars)= fixed costs/ contribution margin ratio

385,000 = 115,500 / contribution margin ratio

contribution margin ratio*385,000 = 115,500

contribution margin ratio= 0.3

Now, we can determine the unitary variable cost:

contribution margin ratio= unitary contribution margin / selling price

0.3 = (7 - unitary variable cost) / 7

2.1 = 7 - unitary variable cost

unitary variable cost= $4.9

Finally, we can determine the fixed costs for 2020 and the net increase with 2019:

Break-even point (dollars)= fixed costs/ contribution margin ratio

454,000= fixed costs / 0.3

$136,200 = fixed costs

Increase= 136,200 - 115,500= $20,700