Question

Office Furniture Inc. sells modular desk units and office chairs in the ratio of 3:2. That is 3 desk units for every 2 chairs sold. The selling prices are $1,280 per desk unit and $540 per chair. The variable costs are $760 per desk unit and $270 per chair. Shared fixed costs total $160,000.

a) Prepare a schedule to compute the selling price and variable cost per composite unit.

b) Compute the break-even point in composite units.

c) Compute the number of units of each product and the total sales revenue per product that would occur at the break-even point.

Answer 1

Solution a:

Computation of the selling price per composite unit
	Quantity	Selling Price per unit		Total per composite unit
Desk Unit	3	$1,280		$3,840
Chair	2	$540		$1,080
Total (Selling price per composite unit)				$4,920
Computation of the Variable cost per composite unit
	Quantity	Variable cost per unit		Total per composite unit
Desk Unit	3	$760.00		$2,280
Chair	2	$270.00		$540
Total (Variable Cost per composite unit)				$2,820

Solution b:

Contribution Margin per composite unit
Sale per composite unit	$4,920
Less: Variable cost per composite unit	$2,820
Contribution Margin	$2,100
Break even point in Composite units
Choose numerator	/	Choose Denominator	=	Break even Units
Total Fixed cost	/	Composite Contribution Margin per unit	=	Break even Units
$1,60,000	/	$2,100	=	76	Units

Solution c:

Determine the number of units of each product that will be sold at the break even point
	Quantity	No.of composite units to break even		Unit sales at break even (In ratio 3:2)	Total Sale revenue at break even
Desk Unit	3	76		228	$2,91,840
Chair	2	76		152	$82,080
Total				380	$3,73,920