Question

I once sat in on a debate between my boss, a divisional controller, and her boss the CFO. The subject of the debate? What is the operating profit and what is net income? That was an interesting hour. If I own a coffee shop class and the two fixed costs are rent(1000.00) per month and my salary(5,000.00 per month). The selling price per cup is 5.00 and the variable cost per cup is 3.00 how many cups do I have to sell to break in units? in dollars?

Answer 1

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

= $5 per unit - $3 per unit

= $2 per Unit

Contribution Margin Ratio = Contribution Margin per Unit / Selling Price per Unit

= $2 per unit / $5 per unit

= 0.40 or 40%

THEREFORE,

Breakeven Units = Total Fixed Costs / Contribution Margin per Unit

= ($1,000 + $5,000) / $2 per unit

= $6,000 / $2 per unit

= 3,000 units

Breakeven Sales = Total Fixed Costs / Contribution Margin Ratio

= ($1,000 + $5,000) / 40%

= $6,000 / 40%

= $15,000