Question

Mathias Corporation manufactures and sells wire rakes. The rakes sell for $20 each. Information about the company’s costs is as follows

Variable manufacturing cost per unit                           $6

Variable selling and administrative cost per unit         $2

Fixed manufacturing overhead per month                   $300,000

Fixed selling and administrative cost per month           $600,000

a) Determine the company’s break-even point in units

b) Determine the company’s break even sales volume in $

c) Calculate unit contribution margin

d) Determine the sales volume (in $) required for a monthly operating income of $1,200,000

e) Estimate the company’s monthly operating loss if it sells only 50,000 units of wire rakes

Answer 1

Variable cost per unit = $ 6 + $ 2 = $ 8

Total Fixed cost = $ 300,000 + $ 600,000 = $ 900,000

a)

Breakeven point in units = Fixed cost/Contribution per unit

                                         = $ 900,000/ ($ 20 - $ 8)

                                         = $ 900,000/$ 12 = 75,000 units

b)

Breakeven point in dollar = Breakeven point in units x Sales per unit

                                          = 75,000 x $ 20 = $ 1,500,000

c)

Unit contribution margin = Sales – Variable cost

                                        = $ 20 - $ 8 = $ 12

d)

Sales volume in $ to get $ 1,200,000 income = (Fixed cost + Desired income)/CM ratio

                                                                        = ($ 900,000 + $ 1,200,000)/ ($ 12/$20)

= $ 2,100,000/0.6 = $ 3,500,000

e)

Sales revenue (50,000 x $ 20)	$ 1,000,000
Less: Variable cost (50,000 x $ 8)	$ 400,000
Contribution margin	$ 600,000
Less: Fixed cost	$ 900,000
Net Profit/loss	- $ 300,000

There will be a loss of $ 300,000 on selling only 50,000 units of wire rakes.