Question

15.

Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $250 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $500,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $150 per 100 yards of XT rope.

1. Estimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards) (Do not round intermediate calculations.)

Contribution Margin per 100 yds. Sales $250 Less: Variable cost 150 Contribution margin $100 Contribution Margin ratio Choose Numerator: / Choose Denominator: = Contribution Margin Ratio / = Contribution margin ratio 0 1(a) Estimate Product XT’s break-even point in terms of sales units. (1 unit = 100 yards) Choose Numerator: / Choose Denominator: = Break-Even Units / = Break-even units 0 1(b) Estimate Product XT’s break-even point in terms of sales dollars. Choose Numerator: / Choose Denominator: = Break-Even Dollars / = Break-even dollars 0

Answer 1

Contribution Margin			per 100 yds.
	Sales		$250
Less:	Variable cost		150
	Contribution margin		$100
Contribution Margin ratio
	Choose Numerator:	/	Choose Denominator:	=	Contribution Margin Ratio
	Contribution margin	/	Sales	=	Contribution margin ratio
	100	/	250	=	40%
1(a) Estimate Product XT’s break-even point in terms of sales units. (1 unit = 100 yards)
	Choose Numerator:	/	Choose Denominator:	=	Break-Even Units
	Total Fixed Costs	/	Contribution Margin per unit	=	Break-even units
	500,000	/	100	=	5,000
					i.e. 500,000 yards of rope
1(b) Estimate Product XT’s break-even point in terms of sales dollars.
	Choose Numerator:	/	Choose Denominator:	=	Break-Even Dollars
	Total Fixed Costs	/	Contribution Margin Ratio	=	Break-even dollars
	500,000	/	40%	=	1,250,000