Question

Presented below are variable costing income statements for Diggs Company and Doggs Company. They are in the same industry, with the same net incomes, but different cost structures. Diggs Co. Doggs Co. Sales $205,000 $205,000 Variable costs 82,000 41,000 Contribution margin 123,000 164,000 Fixed costs 78,000 119,000 Net income $45,000 $45,000 (a1) Compute the break-even point in dollars for each company. Diggs Co. Doggs Co. Break-even point

Answer 1

Diggs CO = 130,000

Doggs CO = 148,750

Step-by-step explanation:

The BEP is the point at which net income equals zero.

`(Fixed\:Cost)/(Contribution \:Margin \:Ratio) = Break\: Even\: Point_(dollars)`

We have the fixed cost as a given data but, not the contribution margin ratio. This how we calcualte:

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

The contribution margin is how much is left from the sales, after paying the variable cost

Then we use this value to calculate the Contribution Margin Ratio:

`(Contribution \: Margin)/(Sales \: Revenue) = Contribution \: Margin \: Ratio`

Which represent how many cent per dollar of sales are eft to afford fixed cost and make a gain

Finally, we calculate the BEP

`(Fixed\:Cost)/(Contribution \:Margin \:Ratio) = Break\: Even\: Point_(dollars)`

Let's work with the company's numbers

Diggs CO

contribution Margin 123,000

Sales Revenue 205,000

CM ratio = 123,000/205,000 = 0.6

Fixed Cost 78,000

BEP 78,000/0.6 = 130,000

Doggs CO

contribution Margin 164,000

Sales Revenue 205,000

CM ratio = 164,000/205,000 = 0.8

Fixed Cost 119,000

BEP 119,000/0.8 = 148,750