Question

Sales (10,000units) $ 70,000 Less variable costs (35,000) Contribution margin $ 35,000 Less fixed costs (32,500) Net income $ 2,500 Requirements: 1. Compute Break-even point in units and explain what the number that you calculated means. 2. Compute break-even point in sales volume (in dollar) and explain what the number that you calculated means. 3. How much sales should be in order to earn a before tax profit of $15000.

Answer 1

• All working forms part of the answer
• Working

	Total	Per unit
Sales	$70,000	$7.00
Variable Cost	$35,000	$3.50
Contribution margin	$35,000	$3.50
Fixed Cost	$32,500
Net Income	$2,500

• Requirement 1

A	Fixed Cost	$32,500
B	Contribution margin per unit	$3.50
C = A/B	Break even point in units	9,286

This means that if 9286 units are sold, there would be neither any net income nor any loss. Break Even is that level where revenues are equal to costs.

• Requirement 2

A	Contribution margin	$35,000
B	Sales	$70,000
C = (A/B) x 100	CM ratio	50%
D	Fixed Cost	$32,500
E = D/C	Break Even point in Sales $	$65,000

This means that if Sales Revenue = $ 65,000, the company will be at Break even point, which means that Net Income (loss) would be equal to $ 0.

• Requirement 3

A	Target Before tax profits	$15,000
B	Fixed Cost	$32,500
C = A+B	Total Contribution margin required to earn target profit	$47,500
D	CM ratio	50%
E = C/D	Sales required to earn target profits	$95,000