Question

X Company, a merchandiser, had the following income statement for 2018:

Sales	$194,274
Cost of goods sold	110,863
Gross margin	$83,411
Other operating expenses	49,915
Profit	$33,496

$92,563 of the cost of goods sold were variable, and $33,715 of the other operating expenses were variable. If cost behavior in 2019 is expected to continue as it did in 2018, what must total sales be in 2019 in order for X Company to break even?

Answer 1

2018:

Sales = $194,274

Variable Expenses = Variable Cost of Goods Sold + Variable Other Operating Expenses
Variable Expenses = $92,563 + $33,715
Variable Expenses = $126,278

Fixed Expenses = Fixed Cost of Goods Sold + Fixed Other Operating Expenses
Fixed Expenses = ($110,863 - $92,563) + ($49,915 - $33,715)
Fixed Expenses = $34,500

Contribution Margin Ratio = (Sales - Variable Expenses) / Sales
Contribution Margin Ratio = ($194,274 - $126,278) / $194,274
Contribution Margin Ratio = 0.35

2019:

Breakeven Sales = Fixed Expenses / Contribution Margin Ratio
Breakeven Sales = $34,500 / 0.35
Breakeven Sales = $98,571.43 or $98,571