Question

Using the data below,calculate the break even point for Del Fabbro International in the present year.

The following data are available on Del Fabbro International, Inc.

i. The fixed (home office) overhead for the past year was $365,200.

ii. Total volume was $5,400,000.
iii. Del Fabbro uses a profit markup of 10%.

iv. The estimating department has indicated that the direct and project (field) indirect costs will be $800,000.

v. Assume a 5% inflation factor and a 12% growth factor.

Answer 1

Calculation of Contribution Margin Ratio:

Given, profit mark up = 10%

Volume adjusted with growth rate for the present year = 5,400,000+(5,400,000*12%) = 6,048,000

Profit for this year = 6,048,000*10% = 604,800

(Note: Fixed Overhead will not change because of inflation as it is a sunk cost.)

Contribution margin = fixed cost + profit = 365200+604800 = 970,000

Contribution margin ratio = 970,000/6,048,000 = 16.04%

Break even Point = Fixed costs/Contribution margin ratio = 365200/16.04% = $ 2,276,808

Therefore, Break even point volume = $ 2,276,808