Question

Sales revenue                                                               $5,625,000

Variable manufacturing expense                  1,875,000

Variable selling and admin expense                 625,000

Fixed manufacturing expense                      1,000,500

      

Fixed selling and administrative expense        562,000

Total Expenses                                                             (4,062,500)

Net operating income                                                    $ 1,562,500

Company produced and sold 625,000 units of products.

Requirements:

1. Compute Break-even point in unit and explain what that number means.
2. Compute Break-even point in dollar sales volume and explain what that number means.
3. If company want to have a pretax profit of $2,000,000, how much they should sell in dollar amount? Explain that number

Answer 1

1)Break-Even Point (in units)= Fixed Cost/ Contribution per unit

                              =$ 1562,500/$ 5= 312,500 units

This number helps Production managers in understanding that at what level of sales units sold they would be able to cover all the expenses of the organization i.e both the fixed and the variable expenses.

Particulars	Per Unit	Total
Selling Price( $ 5625000/625000 units)	$ 9
Less: Variable Cost (N ote 1)	$ 4
Contribution per unit	$ 5
Total Contribution($5*625000 units)		$ 31,25,000
Less: Fixed Cost(N ote 2)		$ 1562,500
Net Operating Income		$ 1562,500

Note:

1. Variable Manufacturing Expenses     =$ 18,75,000

Variable Selling and Admin Expenses=$ 6,25,000

Total Variable Expenses                                       =$ 25,00,000

Variable Cost Per unit= $25,00,000/625000 units=$ 4/unit

2. Fixed Cost per unit:

Fixed Manufacturing Expenses     = $1000,500

Fixed Selling and Admin Expenses=$   562,000

Total Fixed Expenses                       =$ 1562,500

2)Break-Even Point (in dollars)=$ 28,12,500

This amount in dollars indicates the number of units sold by the organization in order to generate that much of revenue in order to meet all its variable expenses and fixed expenses translated into sales dollars

Break-Even Point (in dollars)= Fixed Cost/ PV ratio

PV ratio=Contribution *100/Sales=$ 31,25,000/$ 5625000=0.55556

Therefore Break-Even Point (in dollars)= $ 1562,500/0.55556=$ 2812477.500

Alternative method:

Break-Even Point (in dollars)= Break-Even Point (in units)*Selling Price per unit

                                        =312,500 units*$9/unit=$ 28,12,500

Difference in the answers of the two methods are due to the rounding of decimals in the calculation of the PV ratio.

3)Required sales=$ 92,25,000 in order to earn a profit of $ 2000,000

This figure in dollars indicates the amount of sales revenue that should be generated by the organisation in order to meet all its fixed and variable expenses and earn a profit of $ 2000,000 at the end .

Target Pretax profit=$ 20,00,000

Fixed Expenses= $ 31,25,000

Required Contribution=$ 51,25,000

Contribution per unit=$ 5

Number of units required to be sold=$ 51,25,000/$ 5=1025,000

Required sales=1025,000 units*$ 9/unit=$ 92,25,000