Question

Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $270,000, up to a maximum capacity of 700,000 yards of rope. Forecasted variable costs are $140 per 100 yards of XT rope. 1. Estimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards) (Do not round intermediate calculations.)

Answer 1

(a) 4,500 units

(b) $900,000

Step-by-step explanation:

Given that,

Sales price = $200 per unit

Variable cost = $140 per unit

Fixed costs = $270,000

Contribution margin per unit:

= Sales - variable cost

= $200 - $140

= $60

Contribution margin ratio:

= Contribution margin per unit ÷ Sales per unit

= $60 ÷ $200

= 0.3

(a) Estimate Product XT’s break-even point in terms of sales units:

1 units = 100 yards

Break-even units:

= Fixed costs ÷ Contribution margin per unit

= $270,000 ÷ $60

= 4,500 units

(b) Estimate Product XT’s break-even point in terms of sales dollars:

Break-even dollars:

= Fixed costs ÷ Contribution margin ratio

= $270,000 ÷ 0.3

= $900,000