Question

This year Burchard Company sold 40,000 units of its only product for $17.00 per unit. Manufacturing and selling the product required $125,000 of fixed manufacturing costs and $185,000 of fixed selling and administrative costs. Its per unit variable costs follow. Material $ 4.50 Direct labor (paid on the basis of completed units) 3.50 Variable overhead costs 0.45 Variable selling and administrative costs 0.25 Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 50% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 5%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same. Item1 Part 1 of 2 10 points eBook Print References Check my work Check My Work button is now disabledItem 1 Item 1 Part 1 of 2 10 points Required information Required information [The following information applies to the questions displayed below.] This year Burchard Company sold 40,000 units of its only product for $17.00 per unit. Manufacturing and selling the product required $125,000 of fixed manufacturing costs and $185,000 of fixed selling and administrative costs. Its per unit variable costs follow. Material $ 4.50 Direct labor (paid on the basis of completed units) 3.50 Variable overhead costs 0.45 Variable selling and administrative costs 0.25 Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 50% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 5%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same. Required: 1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. (Round "per unit answers" and "CM ratio" percentage answer to 2 decimal places.)

Answer 1

Contribution margin is the difference between sales and variable cost of the product sold. It is the portion of sales (left after covering variable cost) which can be used to cover fixed costs. It helps to determine the profitability of individual product line because higher the contribution margin higher will be the profits.

Contribution margin ratio is calculated by dividing contribution margin/unit by sales price/unit.

Contribution margin ratio = (Contribution margin/unit) / (Sales price/unit)

Break-even point is the point where total cost of the product is equal to total sales. It the situation where there is no profit no loss. Break-even point in units is calculated by dividing the total fixed cost by its contribution margin ratio.

Break-even point (in dollars) = Total fixed cost / Contribution margin ratio

Given that next year, company will use new material that will reduce material cost and labor cost by 50%. Under Plan 1, the company will keep selling price/unit and sales volume same as last year.

Under Plan 2, sale price/unit is increased by 20%. Although sales volume has also decreased by 5% but ultimately per unit value will not be impacted by it. So, it is not considered while calculating break-even point and contribution margin ratio.

Now, break-even point in dollars and contribution margin ratio calculation is shown in below mentioned table.

Therefore, break-even point in dollars under plan 1 is $428,455.28 and under plan 2 is $402,802.55.

Contribution margin ratio under plan 1 is $72.35% and under plan 2 is 76.96%.