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Q19E

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Financial & Managerial Accounting
Found in: Page 838
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Refer to the information in Exercise 18-16. If the company raises its selling price to $240 per unit, compute its (1) contribution margin per unit, (2) contribution margin ratio, (3) break-even point in units, and (4) break-even point in sales dollars.

  1. Contribution margin per unit: $60.
  2. Contribution margin ratio: 0.25.
  3. Break-even point in units: 5,400 units.
  4. Break-even point in dollars: $1,296,000.
See the step by step solution

Step by Step Solution

Step 1: Definition of Break-Even Units

Break-even units are the number of sales units at which the net operating profits are nil. It is calculated using the fixed cost and the contribution margin per unit.

Step 2: Contribution margin per unit

Particular

Amount $

Sales price per unit

$240

Less: variable cost

(180)

Contribution margin per unit

$60

Step 3: Contribution margin ratio

Step 4: Break-even point in units

Step 5: Break-even point in dollars

Most popular questions for Business-studies Textbooks

This year Burchard Company sold 40,000 units of its only product for $25 per unit. Manufacturing and selling the product required $200,000 of fixed manufacturing costs and $325,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Material

$8.00

Direct labor (paid on the basis of completed units)

5.00

Variable overhead cost

1.00

Variable selling and administrative costs

0.50

Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Required

1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2.

2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.

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