Question

Tom Johnson Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed costs for proposal A are $50,000, and for proposal B, $70,000. The variable cost for A is $12.00, and for B, $10.00. The revenue generated by each unit is $20.00.

A) What is the break-even point in dollars for proposal A? ( enter your response as a whole number)


B) What is the break-even point in dollars for proposal B? ( enter your response as a whole number)

Answer 1

The break-even point in dollars for proposal A is $83,340 and for proposal B, it is $140,000. The break-even point is reached when fixed costs are divided by the contribution margin per unit, then multiplied by the revenue per unit.

Step-by-step explanation:

When assessing the break-even point in dollars for both proposals from Tom Johnson Manufacturing, it is important to understand the formulas used to calculate it. The break-even point is found by dividing the fixed costs by the contribution margin per unit, which is the revenue per unit minus the variable cost per unit. For proposal A, the break-even point is calculated as follows: "$50,000 / ($20.00 - $12.00) = 4,167 units". Since the revenue per unit is $20, the break-even point in dollars is "4,167 units * $20.00/unit = $83,340". For proposal B, the break-even point is: "$70,000 / ($20.00 - $10.00) = 7,000 units", and thus, "7,000 units * $20.00/unit = $140,000".

To summarize, for proposal A, the break-even point in dollars is $83,340, and for proposal B, it is $140,000.

Answer 2

a. $125,000

b. $140,000

Step-by-step explanation:

The computation is shown below:

Break-even point in sales = (Fixed expenses ) ÷ (Contribution margin ratio)

where,

Contribution margin ratio = Contribution margin per unit ÷ selling price per unit

where,

Contribution margin per unit = Revenue generated by each unit - variable cost per unit

a. For proposal A,

Contribution margin per unit would be

= $20 - $12

= $8

And, Contribution margin ratio equal to

= $8 ÷ $20

= 40%

Now the break-even point in dollars would be

= $50,000 ÷ 40%

= $125,000

b. For proposal B,

Contribution margin per unit would be

= $20 - $10

= $10

And, Contribution margin ratio equal to

= $10 ÷ $20

= 50%

Now the break-even point in dollars would be

= $70,000 ÷ 50%

= $140,000