Question

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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:

  1. Use the equation method.

  2. Use the contribution margin per unit approach.

  3. Prepare a contribution margin income statement for the break-even sales volume.

a. Break-even point in units
Break-even point in dollars
b. Contribution margin per unit
Break-even point in units
Break-even point in dollars
RITCHIE MANUFACTURING COMPANY
Contribution Margin Income Statement

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.

ekkarill92 answered 1 year ago
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