Question

Problem 11-28 Determining the break-even point and preparing a contribution margin income statement LO 11-5 Ritchie Manufacturing Company makes a product that it sells for $160 per unit. The company incurs variable manufacturing costs of $70 per unit. Variable selling expenses are $18 per unit, annual fixed manufacturing costs are $496,000, and fixed selling and administrative costs are $274,400 per year. Required Determine the break-even point in units and dollars using each of the following approaches: a. Use the equation method b. Use the contribution margin per unit approach c. Prepare a contribution margin income statement for the break-even sales volume. Complete this question by entering your answers in the tabs below.

Answer 1

Ans. A	Equation method:
	We assumed that the break even units are X.
	On the break even level of sales the net income of the company is $0.
	Break even is the level of activity on which the firm does not generate profit or occur any loss.
	So, the Profit is zero which is equal to the difference of Contribution margin and fixed cost.
	*Contribution margin per unit   = Selling price per unit - Total variable expenses per unit
	$160 - $88 =   $72 per unit
	Net operating income   = (Contribution margin per unit * Break even units) - Total fixed cost
	0     =     ($72 * X) - $770,400
	$770,400 = $72 * X
	Break even quantity (X) = $770,400 / $72
	10,700 units
	Break even point in dollars = (Variable cost per unit * Break even quantity) + Fixed cost + Net income
	($88 * 10,700) + $770,400 + $0
	$941,600 + $770,400 + $0
	$1,712,000
Ans. B	Contribution Margin Per Unit Approach:
	Break even point in units   =    Total fixed cost / Contribution margin per unit
	$770,400 / $72
	10,700 units
	Break even point in dollars = Break even point in units * Selling price per unit
	10,700 * $160
	$1,712,000
Ans. C	RITCHIE MANUFACTURING COMPANY
	Contribution Margin Income Statement
		Total
	Sales (10,700 * $160)	$1,712,000
	Variable expenses (10,700 * $88)	-$941,600
	Contribution margin	$770,400
	Fixed expenses	-$770,400
	Net operating income	$0
	P   =   price per unit
	V = variable cost per unit
	*Working Notes:
	*Calculations of Total variable expenses per unit :
	Total variable expenses per unit = Variable manufacturing cost per unit - Variable selling expense per unit
	$70 + $18   = $88 per unit
	*Calculations of Total Fixed Cost :
	Total fixed cost = Fixed manufacturing cost - Fixed selling and administrative cost
	$496,000 + $274,400   =    $770,400