Question

Break-Even Point and Target Profit Measured in Sales Dollars (Single Product). Nellie Company has monthly fixed costs totaling $100,000 and variable costs of $20 per unit. Each unit of product is sold for $25 (these data are the same as the previous exercise):

Required:

Calculate the contribution margin ratio.

Find the break-even point in sales dollars.

What amount of sales dollars is required to earn a monthly profit of $60,000?

Answer 1

Contribution margin ratio = 20%

Explanation;

Contribution margin ratio = Contribution margin per unit / Sale per unit

Contribution margin per unit ($25 – $20) = $5

Sale price = $25

Hence, contribution margin ratio ($5 / $25) = 20%

Break-even point in sales dollars = $500000

Explanation;

Break-even point in sales dollars = Fixed costs * Sale price / Contribution margin per unit

Break-even point in sales dollars = $100000 * $25 / $5

= $500000

Sales dollars is required to earn a monthly profit of $60,000 = $800000

Explanation;

Sale amount = (Fixed costs + Desired profit / Contribution margin per unit) * Sale price

Sale amount = ($100000 + $60000 / $5) * $25

Sale amount = ($160000 / $5) * $25

= $800000