Question

1. 10) Benny's Custom Chairs produces inexpensive leather chairs. The average selling price for one of the chairs is $500. The variable cost per chair is $250. Benny's has average fixed costs per year of $500,000.
   1. What is the break-even point in units?
   2. What is the break-even point in dollar sales?
   3. What would be the operating profit or loss associated with the production and sale of (1) 2,000 chairs, (2) 4,000 chairs?

Answer 1

(a)-The break-even point in units

Contribution margin per unit

Contribution margin per unit = Selling price per unit – Variable cost per unit

= $500 per unit - $250 per unit

= $250 per unit

Break-even point in units

Break-even point in units = Total fixed costs / Contribution margin per unit

= $500,000 / $250 per unit

= 2,000 units

(b)-The break-even point in dollar sales

The break-even point in dollar sales = Break-even point in units x Selling price per unit

= 2,000 units x $500 per unit

= $1,000,000

(c)(i)-The operating profit or loss associated with the production and sale of 2,000 chairs

The operating profit or loss associated with the production and sale of 2,000 chairs = Total contribution margin – Total fixed costs

= [2,000 units x $250 per unit] - $500,000

= $500,000 - $500,000

= $0

(c)(ii)-The operating profit or loss associated with the production and sale of 4,000 chairs

The operating profit or loss associated with the production and sale of 4,000 chairs = Total contribution margin – Total fixed costs

= [4,000 units x $250 per unit] - $500,000

= $1,000,000 - $500,000

= $500,000 Profit