Question

Perez Company reported the following data regarding the product it sells: Sales price Contribution margin ratio Fixed costs $ 56 25% $350,000 Required Use the contribution margin ratio approach and consider each requirement separately. a. What is the break-even point in dollars? In units? b. To obtain a profit of $42,000, what must the sales be in dollars? In units? c. If the sales price increases to $70 and variable costs do not change, what is the new break-even point in dollars? In units? a. Break-even point in dollars Break-even point in units b. Sales in dollars Sales in units Break-even point in dollars Break-even point in units

Answer 1

Ans. A	Break even point in dollar sales =   Fixed cost / Contribution margin ratio
	$350,000 / 25%
	$1,400,000
	Break even point in units   =    Total fixed cost / (Selling price * Contribution margin ratio)
	$350,000 / ($56 * 25%)
	$350,000 / $14
	25,000 units
Ans. B	Dollar sales for target profit   =   (Fixed expense + Target profit) / Contribution margin ratio
	($350,000 + $42,000) / 25%
	$392,000 / 25%
	$1,568,000
	Unit sales for target profit   =   (Fixed expense + Target profit) / (Selling price * Contribution margin ratio)
	($350,000 + $42,000) / ($56 * 25%)
	$392,000 / $14
	28,000 units
Ans. C	Variable cost per unit at current level of sales = Selling price - (Selling price * Contribution margin ratio)
	$56 - ($56 * 0.25)
	$56 - $14
	$42 per unit
	*New contribution margin ratio if selling price increases and variable cost remain same:
	New selling price = $70 per unit
	Variable cost per unit = $42 per unit
	Contribution margin per unit ($70 - $42) = $28 per unit
	*Contribution margin ratio   = Contribution margin / Selling price * 100
	$28 / $70 * 100
	40%
	New Break even point in dollar sales =   Fixed cost / Contribution margin ratio
	$350,000 / 40%
	$875,000
	New Break even point in units   =    Total fixed cost / (Selling price * Contribution margin ratio)
	$350,000 / ($70 * 40%)
	$350,000 / $28
	12,500 units