Question

Problem 2 (See pages 126-145) Merck Corporation manufactures blood glucose meters. Each meter sells for $50 and has a variable cost of $30. There are $120,000 in fixed costs involved in the production process. (PLEASE SHOW YOUR WORK). a) Calculate Merck's operating break-even point in units b) What is Merck's operating profit (loss) when sales are 7.000 meters? d) Merck's president would like an annual profit of $600,000. How many meters must be sold to attain this profit?

Answer 1

a) Operating break-even point in units = 6,000 units • The breakeven point (BEP) is the volume at which there is neither profits nor losses. At breakeven point, contribution earned exactly equals total fixed costs. BEP in units = a Fixed costs Contribution per unit o Fixed costs = $120,000 o Contribution per unit = Selling price per unit - Variable costs per unit Selling price per unit = $50 • Variable cost per unit = $30 Contribution per unit = $50 - $30 = $20 000 = 6,000 units • Verification: BEP =5120,000 $20 6000 units * $50 6000 units * $30 Sales (BEP) Less: variable costs Contribution margin Less: fixed costs Operating profit $300,000 ($180,000) $120,000 ($120,000) $0

b) Operating profit when sales are 7,000 meters = $20,000 7000 units x $50 7000 units x $30 Sales Less: variable costs Contribution margin Less: fixed costs Operating profit $350,000 ($210,000) $140,000 ($120,000) $20,000

c) Number of meters that must be sold to attain an annual profit of $600,000 = 36,000 units Fixed costs + Desired profit Units to be sold to earn a profit of $600,000 = ? Contribution per unit $120,000+ $600,000 = 36,000 units $20 Verification 36,000 units * $50 36,000 units X $30 Sales Less: variable costs Contribution margin Less: fixed costs Operating profit $1,800,000 ($1,080,000) $720,000 ($120,000) $600,000