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

Contribution margin ratio = 1 - variable cost ratio

= 25%

(a)
`Break\ even\ in\ dollars=(fixed\ costs)/(contribution\ margin)`

`Break\ even\ in\ dollars=(350,000)/(0.25)`

= 1,400,000

`Break\ even\ in\ units=(Break\ even\ in\ dollars)/(sales\ price)`

`Break\ even\ in\ units=(1,400,000)/(56)`

= 25,000

(b) For profit of $42,000,

`sales=(Profit+fixed\ cost)/(contribution\ margin\ ratio)`

`sales=(42,000+350,000)/(0.25)`

= 1,568,000

`In\ units=(sales)/(sales\ price)`

`In\ units=(1,568,000)/(56)`

= 28,000

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

= $56 × 75%

= $42

New contribution margin =
`(New\ sales\ price-variable\ cost)/(New\ sales\ price)`

New contribution margin =
`(70-42)/(70)`

= 0.4

= 40%

`New\ Break\ even\ in\ dollars=(fixed\ costs)/(contribution\ margin)`

`New\ Break\ even\ in\ dollars=(350,000)/(0.4)`

= $875,000

`New\ Break\ even\ in\ units=(New\ Break\ even\ in\ dollars)/(New\ sales\ price)`

`New\ Break\ even\ in\ units=(875,000)/(70)`

= 12,500