Question

The request business is planning to manufacture a new type of tennis ball. Each tennis ball would sell for 3.75 and would require 1.75 in variable costs. In addition, annual fixed costs associated with the project would total 64,000. (A) use the contribution margin approach to calculate: (1) the breakeven point in units (2) the breakeven point in dollars (B) determine the operating income or loss at a sales volume of 30,000 tennis balls. (C) determine the number of tennis balls must be sold to earn a profit of 80,000.

Answer 1

Ans.1	Break even point in units = 32000 units
	*Calculations:
	Break even point in units = Fixed cost / Contribution margin per unit
				64000 / 2
				32000	units
	*Contribution margin per unit = Selling price per unit - variable cost per unit
					3.75 - 1.75
					2
Ans.2	Break even point in dollars =		120008 (rounded)
	Break even point in dollars =   Fixed cost / Contribution margin ratio
				64000 / 53.33%
				120007.5
	Contribution margin ratio = Contribution margin / Sales * 100
			2 / 3.75 * 100
			53.33%
Ans.3	Sales (30000*3.75)		112500
	Less: Variable expenses (30000*1.75)		52500
	Contribution margin		60000
	Less: Fixed costs		64000
	Net operating loss		-4000
Ans.4	Sales units for desired profit = (Fixed cost + Profit) / Contribution margin per unit
				(64000 + 80000) / 2
				72000	units