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Chapter 20: Q7SE (page 1121)

Calculating breakeven point in units, contribution margin ratio given

Ocean Company sells a product with a contribution margin ratio of 80%. Fixed costs are \(2,800 per month. What amount of sales (in dollars) must Ocean Company have to break even? If each unit sells for \)30, how many units must be sold to break even?

Short Answer

Expert verified

The amount of sales is $3,500 and units are 117.

Step by step solution

01

Calculation of amount of sales (in dollars)

Requiredsalesindolllers=Fixedcosts+Targetprofit/Contributionmarginratio=$2,800+$080%=$3,500

02

If each unit sell for $30, how many units must be sold to breakeven

Rquiredsaleinunits=Fixedcosts+Targetprofitcontributionmarginperunit=($2,800+$0)$30脳80%=$2,800$24=117units

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Most popular questions from this chapter

A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to the number of stores, is the manager鈥檚 salary fixed or variable? Why?

Question: Determining fixed cost per unit

For each total fixed cost listed below, determine the fixed cost per unit when sales are 50, 100, and 200 units.

Store rent $ 5,000

Manager鈥檚 salary 3,000

Equipment lease 500

Depreciation on fixtures 250

Question: Determining total variable cost

For each variable cost per unit listed below, determine the total variable cost when units produced and sold are 25, 50, and 100 units.

Direct materials $ 40

Direct labor 80

Variable overhead 9

Sales commission 12

Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the ma卯tre d鈥�. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates:

Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef鈥檚 and dishwasher鈥檚 salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month

Requirements

1. Compute the annual breakeven number of meals and sales revenue for the restaurant.

2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year.

3. How many meals must the Homs serve each night to earn their target profit of $75,600?

4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?

Following is the income statement for Marrow Mufflers for the month of June 2018:

MARROW MUFFLERS

Contribution Margin Income Statement

Month Ended June 30, 2018

Net Sales Revenue (140 units _ \(250) \) 35,000

Variable Costs (140 units _ \(50) 7,000

Contribution Margin 28,000

Fixed Costs 11,500

Operating Income \) 16,500

Requirements

1. Calculate the degree of operating leverage. (Round to four decimal places.)

2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.)

3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.

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