Question

Klinken Corporation's contribution margin ratio on the sale of its most popular product is 40%. The product is priced at $89. annual fixed expenses are $845,000. Management is evaluating two options (1) lewening variable costs by 10% and (2) reducing fixed expenses by 10%. Required: Calculate the current level of break-even sales in dollars, as well as the break-even sales for the two options. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Break-even sales in dollars Option 1: Break-even sales in dollars Option 2. Break-even sales in dollars eBook & Resources CDD

Answer 1

Answer:

Break-even sales in dollars	$2,112,500
Option 1: Break-even sales in dollars	$1,836,957
Option 2: Break-even sales in dollars	$1,901,250

Calculations:

Break-even sales in dollars = Fixed costs ÷ Contribution margin ratio

= $845,000 ÷ 40%

= $2,112,500

Option - 1: If Variable cost reduced by 10%:

Sales	100%
New variable costs [60% - (60% x 10%)]	-54%
New contribution ratio	46%

Break-even sales in dollars = Fixed costs ÷ New Contribution margin ratio

= $845,000 ÷ 46%

= $1,836,957

Option - 2: If Fixed cost reduced by 10%:

New fixed cost = $845,000 - ($845,000 x 10%) = $760,500

Break-even sales in dollars = New Fixed costs ÷ Contribution margin ratio

= $760,500 ÷ 40%

= $1,901,250