Question

1. (a). What is break even point, explain with a good example and a diagram

(b). A company sells a product at $35 per unit. The variable cost for the product is $30 per unit and its fixed cost is $70,000

i, what is the quantity the firm must sell to break even

ii what is the break even point in dollars

2. (a). Explain the meaning of contribution margin with a good example

b). A vehicle spare parts dealer has the following information in her operating budget. Sales were $1,020.000 with fixed costs for the period of $160,000. The total variable cost was $581,400.

Find:

i, The contribution margin

ii Contribution rate

iii Break even point in sales dollars

Answer 1

1.

a) Break even Point:

Break-even point in dollars is the amount of revenue you need to bring in to reach your break-even point.

Formual : Break even point(units) =  Fixed cost / Contribution per unit

  Example:     

Let’s say you own a toy shop and want to figure out your break-even point in units. You know your fixed costs per month, variable costs, and sales per toy.

To figure out how many toys you need to sell to break even, take a look at this break-even point in units example.

• Fixed Costs = $1575
• Variable Costs = $25
• Sales Per Toy = $60

Break even Point = $1575 / $60 - $25 = $4500 / $35 = 45units

So, you need 45 units to break even.

b)

(i) Break even point(units) =  Fixed cost / Contribution per unit

= $70,000 / $35 - $30

= $70,000 / $5

= 14000units

(ii) Break even Point ( Dollars) = 14,000 x $35

= $490,000

2.

a) Contribution Margin:

Contribution margin (CM) is the amount by which sales revenue exceeds variable costs. It is the net amount that sales ‘contribute’ towards periodic fixed costs and profits. It is expressed either as total contribution margin, contribution margin per unit or contribution margin ratio.

Example:

Jump, Inc. is a sports footwear startup which currently sells just one shoe brand, A. The sales price is $80, variable costs per unit is $50 and fixed costs are $2,400,000 per annum

The contribution margin per unit = $80 - $50 = $30

b)

(i) Contribution margin = $1,020,000 - $581,400 = $438,600

(ii) contribution rate = $438,600 / $1,020,000 = 43%   

(iii) Break even Point in dollars = Fixed cost / contribution margin rate

= $160,000 / 43% = $372,093(rounded of to nearest dollar)