Question

Break-Even Point in Sales Dollars

Amount Descriptions

Operating income

Calculate the sales revenue that Head-First must make to break even by using the break-even point in sales equation.

Operating loss

Sales

Total contribution margin

Total fixed cost

Total variable cost

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Variable cost is 60% of the sales price; contribution margin is 40% of the sales price. Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense).

	Required:
1.	Calculate the sales revenue that Head-First must make to break even by using the break-even point in sales equation.
2.	Check your answer by preparing a contribution margin income statement based on the break-even point in sales dollars.

Answer 1

1. Break even point is the point where total sales is equal to total costs. There is no profit no loss.

Break even point in sales = Fixed costs/ contribution margin ratio

Break even point in sales = 49,500/40%

= $123,750

2. Statement showing net income using break even sales:

Particulars	Amt in $
Sales revenues	123,750
Less Variable costs (123,750 × 60%)	(74,250)
Total contribution margin	49,500
Less Fixed costs	(49,500)
Net income	0

As the net income is 0(zero), it shows the sales revenues of $ 123,750 is break even sales.