Question

3. The management of Alberta Eleven Company has received the following forecast for the next year.

Sales Revenue		$600,000
Fixed Costs	$275,000
Variable Costs	$270,000
Total Costs		$545,000
Net Income		$ 55,000

Capacity is a sales volume of $800,000.

a) Compute the contribution margin and the contribution rate.

b) Compute the break-even point

(i) in dollars

(ii) as a percent of capacity.

c) Determine the break-even volume in dollars if fixed costs are increased by $40,000, while variable costs are held to 40% of sales.

Answer 1

Answer to Part a.
Contribution Margin = Sales Revenue – Variable Costs
Contribution Margin = $600,000 - $270,000
Contribution Margin = $330,000

Contribution Margin Rate = Contribution Margin / Sales Revenue * 100
Contribution Margin Rate = $330,000 / $600,000 * 100
Contribution Margin Rate = 55%

Answer to Part b.
Break Even Point (Dollar Sales) = Fixed Cost / Contribution Margin Rate
Break Even Point (Dollar Sales) = $275,000 / 0.55
Break Even Point (Dollar Sales) = $500,000

Break Even Point (as a percent of Capacity) = Break Even Point (Dollar Sales) / Capacity Sales
Break Even Point (as a percent of Capacity) = $500,000 / $800,000
Break Even Point (as a percent of Capacity) = 62.50%

Answer to Part c.
Contribution Margin Rate = 1 – Variable Cost rate
Proposed Contribution Margin Rate = 1 – 0.40
Proposed Contribution Margin Rate = 0.60 or 60%

Proposed Fixed Cost = $275,000 + $40,000 = $315,000

Break Even Point (Dollar Sales) = Fixed Cost / Contribution Margin Rate
Proposed Break Even Point (Dollar Sales) = $315,000 / 0.60
Proposed Break Even Point (Dollar Sales) = $525,000