Question

Ritchie Manufacturing Company makes a product that it sells for $150 per unit. The company incurs variable manufacturing costs of $60 per unit. Variable selling expenses are $18 per unit, annual fixed manufacturing costs are $480,000, and fixed selling and administrative costs are $240,000 per year.

Determine the break-even point in units and dollars using each of the following approaches:
Use the equation method.

Answer 1

The break-even point in units using the equation method is 8,000 units and the break-even point in dollars is $1,200,000.

Step-by-step explanation:

Break-even Point Calculation using the Equation Method:

To calculate the break-even point in units using the equation method, we need to find the contribution margin per unit. The contribution margin per unit is the difference between the selling price per unit and the variable cost per unit. In this case, the contribution margin per unit is $90 ($150 - $60).

The break-even point in units can be calculated by dividing the total fixed costs by the contribution margin per unit. Given that the total fixed costs are $720,000 ($480,000 + $240,000), the break-even point in units is 8,000 units.

The break-even point in dollars can be calculated by multiplying the break-even point in units by the selling price per unit.

Using the break-even point in units of 8,000 units and the selling price per unit of $150, the break-even point in dollars is $1,200,000 (8,000 units * $150).