Question

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.

Sales				$	3,500,000
Cost of sales:
Direct Material	$	500,000
Direct labor		250,000
Variable Overhead		275,000
Fixed Overhead		600,000			1,625,000
Gross Profit				$	1,875,000
Selling and General & Admin. Exp.
Variable		750,000
Fixed		250,000			1,000,000
Operating Income				$	875,000

The break-even point (rounded to the nearest dollar) for Evergreen Corporation for the current year is:

Multiple Choice

• $2,625,000.

• $1,865,672.

• $1,724,138.

• $2,155,172.

Answer 1

Answer: The correct answer is $1,724,138

qVariable Cost = Direct Material + Direct Labor + Variable Overhead + Variable Selling and General & Admin. Exp
Variable Cost = $500,000 + $250,000 + $275,000 + $750,000
Variable Cost = $1,775,000

Fixed Cost = Fixed Overhead + Fixed Selling and General & Admin. Exp.
Fixed Cost = $600,000 + $250,000
Fixed Cost = $850,000

Contribution Margin = Sales – Variable Cost
Contribution Margin = $3,500,000 - $1,775,000
Contribution Margin = $1,725,000

Contribution margin Ratio = Contribution Margin / Sales *100
Contribution Margin Ratio = $1,725,000 / $3,500,000 *100
Contribution Margin Ratio = 0.492857

Break Even Point = Fixed Cost / Contribution Margin Ratio
Break Even Point = $850,000 / 0.492857
Break Even Point = $1,724,138