Question

During a Skype session with Jordan and Taylor, you mention that your current cost model in accounting is break-even analysis. They are not following your explanation, but they say they will swing by with some brownies for a discussion. More brownies! This is paying off, except for those extra pounds.

Selling price to Yumminess at $10 per tin. The cost is $8 per tin, which includes $6 of direct material and $1.50 of direct labor. Annual manufacturing overhead is estimated at $100,000 for the expected sales of 200,000 tins. Operating expenses are projected to be $80,000 annually.

After looking over the costs for manufacturing overhead and operating expenses, you approximate that 85% of manufacturing overhead and 20% of operating expenses are variable costs.

1. What is the TOTAL fixed cost?

2. What is the TOTAL variable cost?

3. What is the contribution margin per UNIT? ( Do not round)

4. How many units are necessary to reach break - even?

5. Jordan is concerned that they will not be able to sell 200,000 tins of brownies. Given 200,000 tins as their expected sales level, what is the decrease of total sales dollars that they endure before they incur a net loss?

Answer 1

	Variable expense	Fixed expense
Manufacturing overhead	100000*.85=85000	100000-85000= 15000
Operating expense	80000*.20=16000	80000-16000= 64000
Total	101000	79000

1)Total fixed cost = 79000

2)Total variable cost = 101000

3)variable manufacturing overhead and operating cost per unit = 101000/200000= $ .505 per unit

total variable cost=6 direct material+ 1.5 labor + .505 = 8.005

contribution per unit = price -variable cost

              = 10-8.005

              = 1.995

4)units to breakeven = fixed cost / contribution per unit

     = 79000/1.995

         = 39599 units

5)decrease of total sales dollars that they endure before they incur a net loss = selling price [expected sales - breakeven sales]

    = 10 [200000-39599]

    = $ 1604010 decrease before they incur loss