Question

Use the information below and answer the questions that follow:
Selling price                             = N$650.00
Lease and rent payments          = N$850 000.00
Cost of goods sold                    = N$70.00
Interest expense                      = N$ 100 000.00
Labour costs                            = N$80.00
A)    What is the company’s contribution margin?           
B)    Calculate the break-even point in units.               
C)   If the company wants to earn a profit of N$200 000.00 instead of breaking even, what is the number of units that the company must sell?   

Answer 1

Variable cost PU = COGS + Labour costs

Variable cost PU = 70 + 80

Variable cost PU = $ 15

Fixed expense = lease payment + interest payment

Fixed Expense = $ 850,000 + $ 100,000

Fixed Expense = $ 950,000

Answer of part A

Contribution PU = Selling price pu - VARIABLE cost pu

Contribution PU = $650 - $150

Contribution PU = $ 500

Answer of part B

Break even point is a point where there is no profit no loss which means profit is zero and in different words break even point is a point where a comapny is covering its fixed cost and nothing else.

Profit = contribution - fixed expense

0 = contribution - $ 950,000

Contribution = $ 950,000

No. Of units = total sales ÷ selling price per unit

Or

No. Of units = total contribution ÷ contribution per unit

For this question we will use 2nd formula

No. Of units = contribution ÷ contribution per unit

No. Of units = $950,000 ÷ $500

No. Of units = 1,900

Answer of part C

In this question we will again use the same formula which we use in above part i.e. part B

Profit = contribution - fixed Expense

$ 200,000 = contribution - $ 950,000

Contribution = $ 1,150,000

No. Of units = contribution ÷ contribution per unit

No. Of units = $ 1,150,000 ÷ $500

No. Of units = 2,300

Note = PU = per unit