Question

The Drink to Forget Manufacturing makes bottles of gin. The following income statement is available for last year, when the company produced and sold 100,000 bottles of gin:

Sales Revenue 2,500,000

Less: COGS 660,000

Gross Margin 1,840,000

Less: Op. Exp. 200,000

Operating Income 1,640,000

The COGS expense includes $2.20 per unit of fixed overhead. In addition, the manufacturer states 70% of their operating expenses are fixed while the other 30% are variable.

Given this information, how many units does this firm need to produce and sell in order to break-even this year?

A. 130,000

B. 22,000

C. 18,000

D 14,000

E. None of the above

Answer 1

OPTION - C. $18,000.

Sales Price Per bottle => $25,000,000/100,000 = $25.

Cost of goods sold Pe unit = Cost / Units sold => $660,000/100000 = $6.6. =>Variable Cost Per Bottle => $6.6 - $2.20 = $4.40

Variable Operating Expenses Per Units => (Operating Expenses * 30%)/Units sold =>($200,000*30%)/100000 => $0.60.

Total Variable Cost Per Bottle => $4.40 + $0.60 = $5.00.

Contribution Margin Per Units => $25 - $5 => $20.

Fixed Expenses => (100,000 * $2.20) + ($200,000*70%) => $360,000.

Breakeven Units => Fixed Cost/Contribution Margin Per Unit => $360,000/$20 = 18,000 Units.

If you have any doubts please comment on the answer.