Question

Cancun Inc. expects to earn $150,000 next year after taxes on sales of $2,200,000. Cancun
manufactures only one size of garbage can. Cancun sells the products for $8 apiece and
they have a variable cost of $2.40 apiece. The company's tax rate is currently 34%.

1.Distinguish among fixed costs, variable costs and semivariable costs.

2.What are the firm's expected fixed costs for next year?

3.What is the break-even point in units and in sales dollars?

Answer 1

1

Fixed costs: Fixed costs are costs that do not change over a production range. Like a factory has production capacity of 1000 units. Rent of factory is fixed at $10,000 whether anything produced or not.

Variable costs: Variable costs vary per unit produced. Like direct material used in the production of finished goods directly related to output quantity.

Semi-variable costs: they vary per unit but contain some fixed portion. Consider telephone connection as an example. Which requires minimum rental of $100 and per minute call price of $1.

2

Particulars	Amount
Profit after tax	$    150,000.00
Add: tax	$      77,272.73
Profit before tax	$    227,272.73
Sales	$       2,200,000
× contribution margin	0.7
Contribution	$       1,540,000
Less: profit before tax	$    227,272.73
Fixed costs	$ 1,312,727.27
Sales	$       2,200,000
× variable cost ratio	0.3
Variable costs	$          660,000

3

Break even point = fixed costs/ contribution per unit = 1,312,727.27/(8-2.4) = 234,415.58

Break even sales = fixed costs/ contribution margin ratio = 1,312,727.27/ 70% = 1,875,324.68

Contribution margin = (8-2.4)/8 = 70%

Variable cost ratio = 2.4/8 =30%

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