In: Accounting
Problem 11-28 Determining the break-even point and preparing a contribution margin income statement
Lucent Manufacturing Company makes a product that it sells for $75 per unit. The company incurs variable manufacturing costs of $30 per unit. Variable selling expenses are $9 per unit, annual fixed manufacturing costs are $240,000, and fixed selling and administrative costs are $165,000 per year.
CHECK FIGURE
a.11,250 units
Required Determine the break-even point in units and dollars using each of the following approaches:
a. Equation method.
b. Contribution margin per unit.
c. Confirm your results by preparing a contribution margin income statement for the breakeven sales volume.
Selling Price per unit = $75
Variable Manufacturing Cost per unit = $30
Variable Selling Cost per unit = $9
Fixed Manufacturing Cost = $240,000
Fixed Selling and Administrative Cost = $165,000
Answer a.
Equation Method:
Let Breakeven Point in units be X
Sales - Variable Manufacturing Cost - Variable Selling Cost -
Fixed Manufacturing Cost - Fixed Selling and Administrative Cost =
0
$75*X - $30*X - $9*X - $240,000 - $165,000 = 0
$36*X - $405,000 = 0
$36*X = $405,000
X = 11,250 units
Break-even point in units = 11,250
Break-even point in dollars = Break-even point in units *
Selling Price per unit
Break-even point in dollars = 11,250 * $75
Break-even point in dollars = $843,750
Answer b.
Selling Price per unit = $75
Variable Cost per unit = Variable Manufacturing Cost per unit +
Variable Selling Cost per unit
Variable Cost per unit = $30 + $9
Variable Cost per unit = $39
Contribution Margin per unit = Selling Price per unit - Variable
Cost per unit
Contribution Margin per unit = $75 - $39
Contribution Margin per unit = $36
Fixed Costs = Fixed Manufacturing Cost + Fixed Selling and
Administrative Cost
Fixed Costs = $240,000 + $165,000
Fixed Costs = $405,000
Break-even Point in units = Fixed Costs / Contribution Margin
per unit
Break-even Point in units = $405,000 / $36
Break-even Point in units = 11,250
Break-even point in dollars = Break-even point in units *
Selling Price per unit
Break-even point in dollars = 11,250 * $75
Break-even point in dollars = $843,750
Answer c.