Question

# Break-Even Point and Target Profit Measured in Sales Dollars (Single Product). Nellie Company has monthly fixed...

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?

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

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