Question

Andre Co. reported sales of $600,000, a contribution margin of $120,000, and an operating loss of $50,000. Based on this information, what was the break-even point in sales dollars?

Multiple Choice

$600,000

$850,000

$800,000

$720,000

Answer 1

Solution :

Calculation of Fixed cost :

The formula for calculating the Operating Profit / - Operating loss is

Contribution margin – Fixed cost = Operating Profit / - Operating loss

As per the information given in the question we have

Contribution margin = $ 120,000 ; Operating loss = - $ 50,000   ;

Applying the above information in the formula we have

$ 120,000 – Fixed cost = - $ 50,000

$ 120,000 = - $ 50,000 + Fixed cost

$ 120,000 + $ 50,000 = Fixed cost

Fixed cost = $ 120,000 + $ 50,000 = $ 170,000

Calculation of Contribution margin :

The formula for calculating the contribution margin ratio is

= Contribution margin / Total sales

As per the information given in the question we have

Contribution margin = $ 120,000 ; Total sales = $ 600,000   ;

Applying the above information in the contribution margin ratio we have

= $ 120,000 / $ 600,000

= 0.20

= 20 %

Thus the contribution margin ratio = 0.20 = 20 %

Calculation of Break even point :

The formula for calculating the Break even point is = Fixed costs / Contribution margin ratio

As per the information available we have

Fixed costs = $ 170,000 ; contribution margin ratio = 0.20

Applying the above information in the formula for Break even point we have

= $ 170,000 / 0.20

= $ 850,000

Thus the break even point in dollars is = $ 850,000

The solution is Option 2 = $ 850,000