Question

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

Number of bikes produced and sold		530		770		950
Total costs
Variable costs	$	129,850	$	?	$	?
Fixed costs per year		?		?		?
Total costs		?		?		?
Cost per unit
Variable cost per unit		?		?		?
Fixed cost per unit		?		?		?
Total cost per unit		?	$	519.75		?

Required:
1. Complete the table.

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 $750.

4. Calculate Hermosa’s break-even point in units and sales revenue.

Answer 1

Answer:

Variable costs:

Variable cost per unit will not change with volume of production. Variable cost in total will change with production.

From the given details, at 530 units total variable cost is given of $129,850 hence variable cost per unit will be = 129,850/ 530 = 245 per unit

Fixed costs per year:

Fixed cost in total will not change with production level.

At 770 units total cost per unit given is 519.75

Fixed cost per unit at 770 units will be = total cost per unit - variable cost per unit = 519.75-245 = 274.75

Total fixed costs = 274.75*770 = 211,557.50

Fixed costs in total will remain same for all the given three levels of production.

1)

Number of bikes produced and sold	530	770	950
Total costs
Variable costs	129,850.00	188,650.00	232,750.00
Fixed costs per year	211,557.50	211,557.50	211,557.50
Total costs	341,407.50	400,207.50	444,307.50
Cost per unit :
Variable cost per unit	245.00	245.00	245.00
Fixed cost per unit	399.17	274.75	222.69
Total cost per unit	644.17	519.75	467.69

Note: Total variable costs = variable cost per unit * units produced and sold

Fixed costs per unit = Total fixed costs/ units produced and sold

2)

Contribution per unit = selling price per unit - variable cost per unit = 750 - 245 = 505

Contribution margin ratio = (selling price per unit - variable cost per unit) / selling price per unit * 100 = (750-245)/750 * 100 = 67.33%

Contribution margin ratio will not change with volume level

Total contribution margin = contribution per unit * sales volume

Below is the table:

Number of bikes produced and sold	530	770	950
Contribution margin ratio	67.33%	67.33%	67.33%
Contribution per unit	505	505	505
Total contribution	267,650	388,850	479,750

4)

Break even units = total fixed costs/ contribution per unit = 211,557.50 / 505 = 419(rounded off)

Break even sales revenue = break even units * selling price per unit = 419*750 = 314,250