Question
In: Accounting
Ritchie Manufacturing Company makes a product that it sells for $190 per unit. The company incurs...
Ritchie Manufacturing Company makes a product that it sells for $190 per unit. The company incurs variable manufacturing costs of $96 per unit. Variable selling expenses are $18 per unit, annual fixed manufacturing costs are $462,000, and fixed selling and administrative costs are $260,000 per year.
Required
Determine the break-even point in units and dollars using each of the following approaches:
-
Use the equation method.
-
Use the contribution margin per unit approach.
-
Prepare a contribution margin income statement for the break-even sales volume.
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Solutions
Expert Solution
| Ans. A | Equation method: | ||
| We assumed that the break even units are X. | |||
| On the break even level of sales the net income of the company is $0. | |||
| Total variable cost per unit ($96 + $18) = $114 per unit | |||
| Total fixed cost ($462,000 + $260,000) = $722,000 | |||
| Selling price * Break even sales units = (Variable cost * Break even sales units) + Total fixed cost | |||
| $190 * Break even sales units = ($114 * Break even sales units) + $522,000 | |||
| ($190 - $114) * Break even sales units = $722,000 | |||
| $76 * Break even sales units = $722,000 | |||
| Break even sales units = $722,000 / $76 | |||
| Break even sales units = 9,500 units | |||
| Break even point in dollars = Selling price * Break even sales units | |||
| $190 * 9,500 | |||
| $1,805,000 | |||
| Ans. B | Contribution margin per unit = Selling price per unit - Total variable cost per unit | ||
| $190 - $114 = $76 per unit | |||
| Break even point in units = Total fixed cost / Contribution margin per unit | |||
| $722,000 / $76 | |||
| 9,500 units | |||
| Contribution margin ratio = Contribution margin per unit / Selling price * 100 | |||
| $76 / $190 * 100 | |||
| 40.00% | |||
| Break even point in dollar sales = Fixed cost / Contribution margin ratio | |||
| $722,000 / 40% | |||
| $1,805,000 | |||
| Ans. C | RITCHIE MANUFACTURING COMPANY | ||
| Contribution Margin Income Statement | |||
| Particulars | Amount | ||
| Sales (9,500 * $190) | $1,805,000 | ||
| Less: Total variable cost (9,500 * $114) | $1,083,000 | ||
| Contribution Margin | $722,000 | ||
| Less: Total fixed cost | $722,000 | ||
| Net income | $0 | ||
| Break even is the level of activity on which the firm does not generate profit or occur any loss. | |||
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