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 $250 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $500,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $150 per 100 yards of XT rope.

1.  iEstimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards)

2. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

Answer 1

Answer:

1. Determination of break-even point in terms of sales units and sales dollars:

Break-Even Point (In Sales Units) = Fixed Cost / Contribution margin per 100 yards of XT rope

= $500,000 / $100

= 5,000 units.

Break-Even Point (In Sales dollars) = (Fixed Cost / Contribution margin per 100 yards of XT rope) x selling price per 100 yards of XT rope

= ($500,000 / $100 ) x $250

= $1,250,000

Note: Calculation of contribution margin per 100 yards of XT rope:

Contribution margin =Selling price per 100 yards of XT rope - Variable cost per 100 yards of XT rope

= $250 - $150

= $100 per 100 yards of XT rope

2. Contribution margin income statement for product XT at the break-even point:

Particulars	Amount
Sales	$1,250,000
Less: Variable Cost ($1,250,000 x 60%	($750,000)
Contribution Margin	$500,000
Less: Fixed Costs	($500,000)
Net Income	$0

Note: Calculation of contribution margin ratio & variable cost ratio:

Contribution margin ratio = Selling price unit - Variable cost per unit / Selling price per unit

= ($250 - $150 ) / $250

= 40%

Variable cost ratio = (1- Contribution margin ratio)

= (1- 40%)

= 60%