Question

Ritchie Manufacturing Company makes a product that it sells for $130 per unit. The company incurs variable manufacturing costs of $66 per unit. Variable selling expenses are $12 per unit, annual fixed manufacturing costs are $450,000, and fixed selling and administrative costs are $226,000 per year.

Determine the break-even point in units and dollars using each of the following approaches:
a. Use the equation method.
b. Use the contribution margin per unit approach.

Answer 1

a. 13,000 units

b. $1,690,000

Step-by-step explanation:

By using the equation method and contribution margin per unit approach is shown below:-

Variable expenses per unit = $66 + $12

= $78

Fixed expenses = $450,000 + $226,000

= $676,000

Contribution margin per unit = Selling price - Variable cost

= $130 - $78

= $52

Contribution margin ratio = Contribution margin ÷ Selling price

= $52 ÷ $130

= 40%

now, by the above calculation we can using the equation method and contribution margin per unit approach.

a.By using equation method is shown below:-

Break even unit in sales = Fixed cost ÷ (Selling price - Variable cost)

= $676,000 ÷ ($130 - $78)

= $676,000 ÷ $52

= 13,000 units

b. By using contribution margin per unit approach is shown below:-

Break even in dollar sales = Units × Selling price

= $676,000 ÷ 40%

= $1,690,000