Question

Sales	$60,000
Less: Variable Expenses	45,000
Contribution Margin	15,000
Less: Fixed Expenses	18,000
Net Income	-$3,000

a. What are the total sales in dollars at the break-even point?

b. What are the total variable expenses at the break-even point?

c. What is the company's contribution margin ratio?

d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the company's expected net income? (Prepare a new income statement.)

Answer 1

• Requirement [a]
  >At Break even point, Contribution margin is EQUAL to Fixed expenses.
  >Hence, Contribution margin = $ 18000 at Break even sales
  >Total Sales in Dollars at Break even point = ($60000 Sales / $ 15000 contribution margin) x $ 18000 required contribution margin
  = (60000/15000) x 18000
  = $ 72,000 Answer
• Requirement [b]
  Total Variable Expense at Break even point
  = ($45000 / 60000 sales) x $ 72000 break even sales
  = $ 54,000
• Requirement [c]
  CM ratio = ($15000 contribution margin / $ 60000 sales) x 100
  =25% (or 0.25)
• Requirement [d]

Sales [$60000 + 10%]	$66,000
Variable expense [$66000 x 75%]	$49,500
Contribution margin	$16,500
Fixed expenses [$18000 - 2000]	$16,000
Net Income	$500