Problem 5-20 I\'d like help with the following problem, but please explain how y
ID: 2422214 • Letter: P
Question
Problem 5-20
I'd like help with the following problem, but please explain how you arrive at your answers. Thank you.
Problem 5-20 Basics of CVP Analysis; Cost Structure [LO1, LO3, LO4, LO5, LO6]
Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very
erratic, with some months showing a profit and some months showing a loss. The company's
contribution format income statement for the most recent month is given below:
Sales (12,900 units at $40 per unit) $ 516,000
Variable expenses 309,600
Contribution margin 206,400
Fixed expenses 230,400
Net operating loss $ (24,000)
Required:
1. Compute the company's CM ratio and its break-even point in
both units and dollars. (Omit the "%" and "$" signs in your
response.)
CM ratio %
Break-even point in units
Break-even point in dollars $
Explanation / Answer
It is given in the question that contribution = 206400 and sales = 516000
a) Contribution Margin ratio = (Contribution Margin/Sales)*100
= (206400/516000)*100
= 40%
b) Break-even point in units
Break even point is a point where company is in a position of no profit no loss.
So, At Breakeven point
Contribution=Fixed Cost
It is clear from the question that selling price is $40 , so contribution per unit is 40% of $40
i.e 40*0.4 = 16
So for generating 230400 contribution , company have to sell
=230400/16
= 14400 Units
c) As clear from point b that break even point in Units is 14400 units , so break even point in $ will be
14400*40= $576000