Question

Mauro Products distributes a single product, a woven basket whose selling price is $18 per unit and whose variable expense is $16 per unit. The company’s monthly fixed expense is $5,000.

Required:

1. Calculate the company’s break-even point in unit sales.

2. Calculate the company’s break-even point in dollar sales. (Do not round intermediate calculations.)

3. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales? (Do not round intermediate calculations.)

Answer 1

Selling price per unit = $18

Variable expense per unit = $16

Fixed expense = $5,000

Contribution margin per unit = Selling price per unit- Variable expense per unit

= 18-16

= $2

Contribution margin ratio = Contribution margin per unit/ Selling price per unit

= 2/18

= 11.11111111%

1.

Break even point in unit sales = Fixed expense/ Contribution margin per unit

= 5,000/2

= 2,500 units

2.

Break even point in dollar sales = Fixed expense/ Contribution margin ratio

= 5,000/11.11111111%

= $45,000

3.

Fixed expenses increase by $600

Net fixed expenses= 5,000+600

= $5,600

New break even unit sales = Net fixed expense/ Contribution margin per unit

= 5,600/2

= 2,800 units

New Break even point in dollar sales = New Fixed expense/ Contribution margin ratio

= 5,600/11.11111111%

= $50,400