Question

PROBLEM 3 – Contribution Margin Income Statement
Brooks Company manufactures a product that sells for $50 per unit. Brooks incurs a variable cost per unit of $35 and $2,400,000 in total fixed costs to produce this product. It is currently selling 200,000 units.
Instructions: Complete each of the following requirements:

(b) Compute the contribution margin per unit and contribution margin ratio.



(c) Compute the break-even point in units.


(d) Compute the break-even point in dollars.


(e) Compute the number of units that must be sold in order to generate net income of $300,000 using the contribution margin per unit.


(f) Brooks is considering giving a commission to its sales staff based on 10% of sales, which will decrease fixed costs by $400,000 and increase sales volume 20%. Calculate the resulting Net Income based on the changes. Should Brooks make the change?

Answer 1

(b) contribution margin per unit = Sales Per Unit - Variable Cost Per Unit

= $ 50 - $ 35

= $ 15

and contribution margin ratio= contribution margin / Sales Per Unit *100

= $ 15 / $ 50 *100

= 30%

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c) break-even point in units = Fixed Cost /   contribution margin per unit

= $ 2,400,000 / $ 15

= 160,000 Units

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d) break-even point in dollars = Fixed Cost /   contribution margin ratio

= $ 2,400,000 / 30%

= $ 8,000,000

---------

e) Net Income = $ 300,000

Add: Fixed Cost = $ 2,400,000

Required Contribution Margin = $ 2,700,000

contribution margin per unit = $ 15

The number of units that must be sold in order to generate net income = Required Contribution Margin / contribution margin per unit

= $ 2,700,000 / $ 15

= 180,000 Units