Question

Hermosa, Inc., produces one model of mountain bike. Partial information for the company follows:

Number of bikes produced and sold		520		830		930
Total costs
Variable costs	$	126,880	$	?	$	?
Fixed costs per year		?		?		?
Total costs		?		?		?
Cost per unit
Variable cost per unit		?		?		?
Fixed cost per unit		?		?		?
Total cost per unit		?	$	529.75		?
Required: 1. Complete the table. (Round your "Cost per Unit" answers to 2 decimal places.) Number of bikes produced and sold 520 Units 830 Units 930 Units Total costs Variable costs $126,880 Fixed costs per year Total costs $126,880 $0 $0 Cost per unit Variable cost per unit Fixed cost per unit Total cost per unit $0.00 $529.75 $0.00

2. Calculate Hermosa’s contribution margin ratio and its total contribution margin at each sales level indicated in the table assuming the company sells each bike for $710. (Round your percentage answers to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

	520 Units 830 Units 930 Units Contribution Margin Ratio % % % Total Contribution Margin

4. Calculate Hermosa’s break-even point in units and sales revenue. (Round your answers to the nearest whole number.)

	Break-Even Units Bikes Break-Even Sales Revenue

Answer 1

Hermosa Inc

1. Complete the table –

Number of bikes produced and sold	520 units	830 units	930 units
total costs -
variable costs	$126,880	$202,520	$226,920
Fixed cost per year	$237,172.50	$237,172.50	$237,172.50
Total costs	$364,052.50	$439,692.50	$464,092.50
Cost per unit -
Variable cost per unit	$244	$244	$244
Fixed cost per unit	$456.10	$285.75	$255.02
Cost per unit	$700.10	$529.75	$499.02

Determination of fixed cost per year:

Variable cost at 520 units = $126,880

Variable cost per unit = $244

Given total cost per unit at 830 units = $529.75

Less: variable cost per unit = $244

Fixed cost per unit = $285.75

Total fixed cost at 830 units = 830 x $285.75 = $237,172.50

Since fixed cost per year remains constant at any level of activity, fixed cost for 520 units, 830 units and 930 units = $237,172.50

1. Contribution margin ratio and total contribution margin at each sales level given sales price per unit = $710

Contribution margin per unit = sales price per unit – variable cost per unit

Sales price per unit = $710

Variable cost per unit = $244

Contribution margin (CM) per unit = $466

CM ratio = CM/Sales price = $466/$710 = 65.63%

	520 units	830 units	930 units
Contribution margin ratio	65.63%	65.63%	65.63%
Total Contribution margin at $466 per unit	$242,320	386,780	$433,380

1. Break-even point in unit sales and dollars –

Break-even point in unit sales = Fixed cost/CM per unit

Fixed cost = $237,172.50

CM per unit = $466

Break-even point in unit sales = $237,172.50/$466 = 509 bikes (rounded to nearest whole number)

Break-even point in sales revenue –

Break-even point in sales revenue = Fixed cost/CM ratio

Fixed cost = 237,172.50

CM ratio = 65.63%

Break-even point in sales revenue = 237,172.50/65.63% = $361,378

Break-even units	$509	Bikes
Break-even Sales Revenue	$361,378