Question

Break-Even Sales

BeerBev, Inc., reported the following operating information for a recent year:

Sales	$2,976,000
Cost of goods sold	$744,000
Selling, general and administration	558,000
	$1,302,000
Income from operations	$ 1,674,000

In addition, assume that BeerBev sold 31,000 barrels of beer during the year. Assume that variable costs were 75% of the cost of goods sold and 50% of selling, general and administration expenses. Assume that the remaining costs are fixed. For the following year, assume that BeerBev expects pricing, variable costs per barrel, and fixed costs to remain constant, except that new distribution and general office facilities are expected to increase fixed costs by $14,000.

a. Compute the break-even sales (barrels) for the current year. Round to the nearest whole barrel.
barrels

b. Compute the anticipated break-even sales (barrels) for the following year. Round to the nearest whole barrel.
barrels

Answer 1

Answer

(a) Break-even sales(barrels) for the current year

Break-even sales = Fixed Cost / Contribution per unit

Calculation of Contribution per unit

Cost of Goods Sold - $ 744,000

- Variable cost (75%) = $ 558,000

- Fixed cost (25%) = $ 186,000

Selling, General and administration - $ 558,000

- Variable cost (50%) = $ 279,000

- Fixed cost (50%) = $ 279,000

Therefore Total Variable Cost = ($ 558,000 + $ 279,000) = $ 837,000

Total Fixed Cost = ($ 186,000 + $ 279,000) = $ 465,000

Contribution = Sales - Variable cost

= $ 2,976,000 - $ 837,000

= $ 2,139,000

Contribution per unit = $ 2,139,000 / 31000

= $69

Break Even Sales = $ 465,000 / $ 69

= 6739 barrels

(b) Anticipated Break-even sales(barrels) for the following year

Contribution per unit = $ 69

New Fixed Cost = $ 465,000 + $ 14,000

= $ 479,000

Break Even Sales = $ 479,000 / $ 69

= 6942 barrels