Question

Warrington LTD makes and sells one product. Unit costs for direct materials and direct labor are $24 and $36. In March, 20K units were produced, and total overhead was $214K. In April, 26K units were produced, and total overhead was $259K. The selling price of the unit is $100.

1. Compute the total fixed overhead of the company

2. Compute the contribution margin ratio

3. Compute the company's break-even point in sales dollars

4. Compute the number of units must be sold to have net income of $122K

Answer 1

1.
	Total overhead cost	Units
High level of activity	259000	26000
(-) Low level of activity	214000	20000
Difference	45000	6000

Variable overhead per unit = Difference in total overhead cost / Difference in units = 45000 / 6000	7.5	per unit
Now let us calculate total fixed overhead from the data of high level of activity.
Total overhead cost = Total fixed overhead + ( Units * Variable overhead per unit )
259000 = Total fixed overhead + ( 26000 * 7.5 )
259000 = Total fixed overhead + 195000
Total fixed overhead cost = 259000 - 195000	64000

2.
Direct materials per unit	26
Direct labor per unit	36
Variable overhead per unit	7.5
Total variable cost per unit	69.5
Contribution margin per unit = Selling price per unit - Total variable cost per unit = 100 - 69.5	30.5
Contribution margin ratio = Contribution margin per unit / Selling price per unit = 30.5 / 100	30.50%

3.
Break-even point in sales dollars = Fixed costs / Contribution margin ratio = 64000 / 30.5%	209836
4.
Number of units to be sold = ( Fixed costs + Net income ) / Contribution margin per unit = ( 64000 + 122000 ) / 30.5	6098	units