Question

Hawke Caribbean Sales has developed the following projections for the upcoming year of operations.

Sales of 100,000 units at $5 Units sold equal units produced
Variable costs for 100,000 units:
Direct material	$125,000
Direct labor	100,000
Variable overhead	30,000
Selling and administrative expense	45,000
Total fixed costs	120,000

What is Hawke’s projected breakeven point in dollars?

	a.	$500,000
	b.	$120,000
	c.	$130,000
	d.	$300,000

Answer 1

Solution: Answer d $300,000

It should be noted that the break-even point in dollars is calculated by dividing a company's fixed expenses by the company's contribution margin ratio.

We are already provided with total fixed expenses in the question.

Let's compute Contribution Margin ratio:

Contribution = Sales - Variable Costs

Contribution Margin Ratio:

Particulars	Per Unit	Calculation
Sales	5
Less: Variable Costs:
Direct Material	1.25	(125000/100000)
Direct Labor	1	(100000/100000)
variable Overhead	0.3	(30000/100000)
Saelling & administrative cost	0.45	(45000/100000)
Net Contribution	2
Contribution Margin Ratio	40.0%	Net Contribution / Sales *100

Break-even point in dollars = Fixed Cost/ Contribution Margin Ratio

= 120,000 / 40%

= 300,000

We can concluade here that $2 of contribution will be made per unit and the same is available to pay a current fixed cost of $120,000. While the same contribution can be earned to pay a fixed cost of upto $300,000 which will result in no profit no loss.