Question

Reid Company is considering the production of a new product. The expected variable cost is $23 per unit. Annual fixed costs are expected to be $966,000. The anticipated sales price is $92 each. Required Determine the break-even point in units and dollars using each of the following: Use the equation method. Use the contribution margin per unit approach. Use the contribution margin ratio approach. (Do not round intermediate calculations. Round "Contribution margin ratio" to 1 decimal place. (i.e., 0.234 should be entered as 23.4))

a. Break-even point in units

Break-even point in dollars

b. Contribution margin per unit

Break-even point in units

Break-even point in dollars

c. Contribution margin ratio %

Break-even point in units

Break-even point in dollars

Answer 1

Equation method

Break-even point in Units = Fixed Cost / (sales price – variable cost)

= 966,000 / (92-23)

= 14,000

Now breakeven point in Dollars = breakeven quantity * price

= 14,000 * 92

= $ 1,288,000

Contribution margin approach

We need to find the contribution per unit first

Contribution margin per unit = selling price – variable cost

= $ 92 - $ 23

= $ 69

Now breakeven point in Units = Fixed cost/ contribution per unit

= 966,000 /69

= 14,000 units

Now breakeven point in Dollars = breakeven quantity * price

= 14,000 * 92

= $ 1,288,000

Contribution margin ration

contribution margin ratio per unit = (Sales - Variable expenses) /Sales

= ( 92 – 23) /92

= 75% = .75

Now breakeven point in unit = breakeven sales value / price

= $ 1,288,000 /92 = 14,000 unit

Break-even point in Dollars = Fixed Cost / contribution ratio

= 966,000/.75

= $ 1,288,000

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