Question

Bright Eyes manufactures and sells two products. The first product is a disposable contact lens set that lasts about 3 months. The second product is a wetting solution. Customers of the first product use one bottle of solution each month. As a result, bottles of solution outsell lens sets by a 3:1 ratio. Lens sets sell for $36 per set, and have a contribution margin ratio of 50%. The solution sells for $6 per bottle, but only generates variable costs of $1. The company's total fixed costs are $9,900,000.

(a) What level of total sales is necessary to achieve break even?
(b) If a competitor began selling a wetting solution that forced Bright Eyes to reduce the price for its solution to $3 (to maintain market share and the 3:1 ratio of solution to lens), how many lens sets must be sold for the company to break even?

Answer 1

A . Break even point = 19,800,000 units

B . Break even point on lens = $14,850,000

Step-by-step explanation:

Given:

Ratio between wetting solution and lens = 3:1

Sales price of lens = $36

Contribution margin ratio = 50%

Sales price of wetting solution= $6

Variable cost on wetting solution = $1

Total Fixed cost = $9,900,000

A . Computation of Break even point:

Break even point = Total Fixed cost / Contribution margin ratio

Break even point = $9,900,000 / 50%

Break even point = 19,800,000 units

B . Computation of Break even point on lens:

Break even point on lens = 19,800,000 × lens ratio × $3

Break even point on lens = 19,800,000 × (1/4) × $3

Break even point on lens = 19,800,000 × 0.25 × $3

Break even point on lens = $14,850,000