Question

Mauro Products distributes a single product, a woven basket whose selling price is $15 [per unit] and whose variable expense is $12 [per unit].  The company’s monthly fixed expense is $3,000.

Required

      1.  Solve for the company’s break-even point in unit sales.  Show computations.

      2.  Determine the company’s break-even point in Total Sales Dollars.  Show computations.

      3.  Discuss graphical considerations.

1.  Break-even point in Units

2.  Break-even in Total Sales Dollars

3.  Graphical Considerations

    Explain how the lines [discuss which lines change and how they change]  on a Cost-Volume-Profit

    graph would change if BOTH Variable cost per unit increased AND Total fixed costs increased.

    Discuss how these changes would affect the Breakeven Point.

Answer 1

1) Contribution per unit = Selling price per unit - Variable cost per unit = $ 15 - $ 12 = $ 3

Break even sales in units = Total Fixed cost / Contribution per unit

Break even sales in units = $ 3,000 / $ 3 = 1,000 units.

2) PV ratio or CM ratio = [ Contribution per unit / Selling price per unit ] X 100 %

PV ratio or CM ratio = [ $ 3 / $ 15 ] X 100 % = 20%

Break even sales in dollars = Total Fixed cost / PV ratio

Break even sales in dollars = $ 3,000 / 20 %

Break even sales in dollars = $ 3,000 X 100/20 = $ 15,000

3) Graphical consideration :

Conclusion :

If variable cost per unit reduced then the following will be the consequences :

1)Total Fixed cost line will be straight and no deviation would be there.

2) The slope of total cost line would be slightly flattered .

3) Sales revenue line would have been same.

4) The area of loss suffering zone would have been reduced .

5) With the decrease in variable cost per unit , Break even sales in units and dollars would be reduced.