Question

Lorne is considering working for Part-Time Painters. He would operate as an independent painter, but the jobs would be given to him by the company. In the company's advertisements, $100 would be charged for each room painted. The painter would then receive 80% of the amount billed. For each job, the painter would supply paint and brushes, at a cost of $38. Each painter must have his or her own ladders, drop cloths, and other tools, at a cost of $720.

Perform a break-even analysis showing computation of the
(a) contribution margin
(b) contribution rate
(c) break-even point in units
(d) break-even point in sales dollars.

Answer 1

A break-even analysis for Part-Time Painters shows that Lorne will have a contribution margin of $42 per room, a contribution rate of 42%, need to paint 18 rooms to break even, and reach a break-even point of $1,800 in sales dollars. Correct answer is (a) contribution margin.

Step-by-step explanation:

Lorne is considering working for Part-Time Painters and needs to perform a break-even analysis. The contribution margin is calculated as the amount a painter receives per room minus the cost of paint and brushes. Since the painter gets 80% of the $100 charged per room, the revenue is $80 per room. The cost of paint and brushes is $38, thus the contribution margin is $80 - $38 = $42 per room. The contribution rate is the contribution margin divided by the price per room. This comes out to $42 / $100 = 0.42 or 42%.

To find the break-even point in units, we divide the total fixed costs by the contribution margin. Lorne's fixed costs, which include ladders, drop cloths, and other tools, are $720. Thus, the break-even point in units is $720 / $42 = approximately 17.14, or 18 rooms when rounded up to the nearest whole number since Lorne can't paint a fraction of a room. The break-even point in sales dollars is the break-even point in units times the price charged per room, which is 18 rooms x $100 = $1,800. Conducting this analysis helps Lorne understand the financials of the painting jobs and make an informed decision on whether or not to work with Part-Time Painters. Advertisements often simplify the costs and returns of jobs, but a break-even analysis brings clarity to the actual earnings potential. So, the correct answer is (a) contribution margin.