Question

Jingo Company has reported $750,000 in sales (25,000 units) for last year with a net operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, which of the following is correct? *

a-The contribution margin ratio is 40%.

b-The break-even point is 24,000 units.

c-The variable expenses are 60% of sales.

d-The variable expenses per unit are $9 per unit.

Answer 1

Jingo Company has reported $750,000 in sales (25,000 units) for last year with a net operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, which of the following is correct? *

a-The contribution margin ratio is 40%.

b-The break-even point is 24,000 units.

c-The variable expenses are 60% of sales.

d-The variable expenses per unit are $9 per unit

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Ans: d-The variable expenses per unit are $9 per unit.

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This question we can solve using the given details:

Sales = $750000

Units sold = 25000 so,

Selling price = 750000 / 25000 = $30 per units

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Also give the operating income = $25000

At the break-even point, the company's total contribution margin equals $500,000.

Using those items we need to calculate contribution margin ratio, break-even point units,variable expense ratio and variable cost per units

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At the break-even point, the company's total contribution margin equals $500,000

Which means fixed cost = $500000

Because, At the break-even point, the company's total contribution margin equals Fixed cost. At break-even point the operating income will be zero. For getting operating income become zero

Contribution margin - fixed cost = zero

$500000 - Fixed cost = 0

So fixed cost = $500000

All the units level the fixed cost is same in the relevant range. So whatever the units produced the fixed cost are same.

So, the units level 25000 the fixed cost are $500000

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Also remember the operating income formula from sales that:

sales	$750000
Less Variable cost	(b) ($225000)
= contribution margin	(a) $525000
Less fixed cost	($500000)
=Operating income	$25000

(a) contribution margin = fixed cost + Operating income (reverse order)

contribution margin = 500000 + 25000 = 525000

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(b) Variable cost

Sales - variable cost = contribution margin

Variable cost = sales - contribution margin

Variable cost = 750000 - 525000 = $225000

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Contribution margin ratio = contribution margin / sales

Contribution margin ratio = 525000 / 750000 = 0.7 = 70%

break-even point units = Fixed cost / Contribution margin per units

Contribution margin per units = Contribution margin / units

Contribution margin per units = 525000 / 25000 = $21 per units

break-even point units = 500000 / 21 = 23810 units

Variable expense ratio = variable expense / sales

Variable expense ratio = 225000 / 750000 = 0.3 = 30%

variable cost per units = Variable cost total / units sold

variable cost per units = 225000 / 25000 = $9

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So the correct option is

d-The variable expenses per unit are $9 per unit.