Question

Lucky Brands has two divisions: Cigars and Rum. The following data is from its most recent operating period:

                                                                        Cigars             Rum

            Sales                                                    $310,000         $205,000

            Variable expenses                               $80,290           $42,795

            Traceable fixed expenses                    $118,800         $90,000

The company’s common fixed expenses were $48,000 and are allocated to the divisions on the basis of sales.

1. What is the Cigar division’s break-even in sales dollars?

2. What is Lucky Brands’ overall break-even in sales dollars?

Answer 1

	Cigars		Rum		Total
	Amount	% of sales	Amount	% of sales	Amount	% of sales
Sales	310000	100.00%	205000	100.00%	515000	100.00%
Less: Variable expenses	80290	25.90%	42795	20.88%	123085	23.90%
Contribution margin	229710	74.10%	162205	79.12%	391915	76.10%
1
Cigar division’s break-even = Traceable fixed expenses/Contribution margin ratio
Cigar division’s break-even = 118800/74.10%= $160324 (rounded off)
2
Total fixed expenses = 118800+90000+48000= $256800
Lucky Brands’ overall break-even =Total fixed expenses/Contribution margin ratio
Lucky Brands’ overall break-even = 256800/76.10%= $337451 (rounded off)