Question

Baker Company sells one product. Management estimates that the company will sell 6,000 units of the product each year. The relevant information about the product line of Baker Company for the year ended December 31, 2014 appears below:

Breakeven units: 4,000 units

Variable expenses per unit:

Direct Material: $35

Direct labour: $25

Variable production overhead: $30

Fixed expenses:

Fixed Production overhead $190,000 per annum

Fixed selling and administrative $50,000 per annum

There was no inventory in stock at the beginning or end of the year.

Required:

i) What was the selling price per unit?

ii) Prepare a contribution margin statement for Baker Company.

iii) What is the contribution to sales ratio?

iv) Use the contribution margin approach to compute Baker Company’s breakeven point in dollars.

Answer 1

(1) Total Variable cost per unit = 35 + 25 + 30 = $90

    Total Fixed Cost = 190000 + 50000 = $240000

Let ‘X’ be the SP

Cont per unit = X – 90

BEP = 4000 units

4000 units = 240000/(X-90)

4000X – 360000 = 240000

4000X = 600000

X = $150

(2) Contribution Margin Statement :-

Sales (6000 units * 150)		900000
Less:-Variable cost:-
Direct Material (35 * 6000)	210000
Direct Labour (25 *6000)	150000
Variable prod O/H(30 * 6000)	180000	(540000)
Contribution Margin		360000

(3) Contribution to sales ratio = Contribution pu/Sales pu

     = (150-90)/150 = 40%

(4) BEP(in $) = Fixed cost/contribution %

     = 240000/40% = $600000