Question

7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.) *

**3. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY. A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost. B. Explain the importance of distinguishing between variable and fixed costs. C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information. a. Cost of goods sold of $35 per unit b. Labor = $400/month • One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month. c. Advertising fees = $3,000 d. Bank fees = $200 e. Phone/internet = $150 per month f. Shipping = $3 per unit g. Utilities = $100 per month h. Office Supplies = $900 i. Conference Exhibitor Fee = $3000 j. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

Answer 1

Classification of each of the costs as Variable and fixed costs:

a	Cost of Goods sold	Variable cost
b	labour	Fixed
	Part time Employee	Fixed
c	Advertising Fee	Fixed
d	bank fee	Fixed
e	Phone / Internet	Fixed
f	Shipping	Variable cost
g	Utilities	Fixed
h	Office supplies	Fixed
i	Conference Exhibitor Fee	Fixed
j	Travel Expenses for conference	Fixed

2) Fixed cost doesn’t change with changes in the volume of production. Whereas, variable cost changes with the volume change. When production volume goes up, the variable costs will increase. On the other hand, if the volume goes down, so too will the variable costs. Fixed costs remain the same regardless of whether goods or services are produced or not. Thus, a company cannot avoid fixed costs. The more fixed costs a company has, the more revenue a company needs in order to break even.

3)

Budgeted Income Statement
Sales in Units	600
Selling price	85
Sales in value	51000
Cost of goods Sold (35*600)	21000
Gross Margin	30000
Labor (400*12)	-4800
Part-time Employee (40*10*12)	-4800
Advertising fee	-3000
Bank fees	-200
Phone/Internet (150*12)	-1800
Shipping (3*600)	-1800
Utilities (100*12)	-1200
Office Supplies	-900
Conference Exhibitor Fee	-3000
Travel Expenses for conference	-1200
Total Expenses	-22700
Net Profit	7300

Selling price = $85 per unit

Variable cost:

Cost of Goods sold = $35 per unit

Shipping = $3 per unit

Total Variable cost per unit = 35 + 3 = $38

Contribution margin = 85 – 38 = $47

Fixed cost = 4800 + 4800 + 3000 + 200 + 1800 + 1200 + 900 + 3000 + 1200

Total Fixed cost = 20,900

Break-even point units = Fixed cost / C.M

                                                = 20,900 / 47 = 444.68 ≈ 445 units

Break-even point in sales = 445*85 = $37,825