Question

Klinken Corporation’s contribution margin ratio on the sale of its most popular product is 52%. The product is priced at $94, annual fixed expenses are $870,000. Management is evaluating two options: (1) lowering variable costs by 15% and (2) reducing fixed expenses by 15%.

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-

Answer 1

Option 1-BEP($)=Fixed Cost/C.M Ratio

=870000/59.20%=1469595

Workings

Sales per Unit=94

Contribution Margin per unit=0.52*94=48.88

V.C.=94-48.88=45.12

V.C. Down by 15%-New V.C.=45.12-(45.12*15%)=38.352

New Contribution-55.648

C.M Ratio-55.648/94=0.592 or 59.20%

Option 2

BEP($)=Fixed Cost/Contribution Margin Ratio

= 739500/0.52=1422115

Workings

New Fixed Cost-870000-(870000-15%)=739500

Break Even Sales=Fixed Cost/Contribution Margin per unit

Option 1=870000/55.648=15634

Option 2=739500/48.88=15129