Question

18. CVP and Break-Even Analysis LOI, 2.3 Lauren Tarson and Michele Progransky opened Top Drawer Optical seven years ago with the goal of pr ducing fashionable and affordable eyewear. Tarson and Progransky have been very pleased with their revenue growth. One particular design, available in plastic and metal, has become one of the company best sellers. The following data relate to this design Sales price Direct materials Direct labor Variable overhead Budgeted unit sales Plastic Frames $ 60.00 20.00 13.50 Metal Frames S 80.00 18.00 13.50 8.50 30,000 6.50 10,000 Currently, the company produces exactly as many frames as it can sell. Therefore, it has no opportu- nity to substitute a more expensive frame for a less expensive one. Top Drawer Optical's annual fixed costs are $1.225 million. Required Each of the following is an independent situation. A. Calculate the total number of frames that Top Drawer Optical needs to produce and sell to break even. B. Calculate the total number of frames that Top Drawer Optical needs to produce and sell to break even if budgeted direct material costs for plastic frames decrease by $10 and annual fixed costs increase by $12,500 for depreciation of a new production machine.

Answer 1

A.

	Plastic Frames	Metal Frames
Sale price	$60	$80
Less: Variable cost:
Direct material	20	18
Direct labor	13.5	13.5
Variable overhead	6.5	8.5
Total variable cost	40	40
Contribution per unit	$20	$40
Sales mix ratio	25% (10,000/40,000)	75% (30,000/40,000)
	5	30

Combined contribution per unit = $35

Break even point in units = Fixed cost / Contribution per unit

Break even point in units = $1,225,000 / $35 = 35,000 Frames

B.

	Plastic Frames	Metal Frames
Sale price	$60	$80
Less: Variable cost:
Direct material	10 (20-10)	18
Direct labor	13.5	13.5
Variable overhead	6.5	8.5
Total variable cost	30	40
Contribution per unit	$30	$40
Sales mix ratio	25% (10,000/40,000)	75% (30,000/40,000)
	7.5	30

Combined contribution per unit = $37.5

Break even point in units = $1,237,500 (1,225,000+12,500) / $37.5 = 33,000 Frames

C.

	Plastic Frame	Metal Frame
Contribution per unit	$20	$40
Sales mix ratio	35% (10,000/40,000)	65% (30,000/40,000)
	7	26

  Combined contribution per unit = $33

Break even point in units = $1,122,000 / $33 = 34,000 Frames