Question

James Motors sells a single product with a selling price of $400 with variable costs per unit of $160. The company’s monthly fixed expenses are $36,000.

1. What is the company’s break-even point in units?
2. What is the company’s break-even point in dollars?
3. How many units will James need to sell in order to realize a target profit of $48,000?
4. What dollar sales will James need to generate in order to realize a target profit of $48,000?

Answer 1

Contribution margin per unit = Selling price per unit - Variable costs per unit

= $400 - $160

= $240

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $240 / $400

= 0.6

A. Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $36,000 / $240

= 150

B. Break-even point in dollars = Fixed expenses / Contribution margin ratio

= $36,000 / 0.6

= $60,000

C. Unit sales required = (Fixed expenses + Desired profit) / Contribution margin per unit

= ($36,000 + $48,000) / $240

= 350

D. Dollar sales required = (Fixed expenses + Desired profit) / Contribution margin ratio

= ($36,000 + $48,000) / 0.6

= $140,000