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Ch 5: E 5,6,7
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Exercise 5-6 Compute the Break-Even Point [LO5-5]
Mauro Products distributes a single product, a woven basket whose selling price is $22 and whose variable expense is $19.36 per unit. The company’s monthly fixed expense is $4,488.
Solve for the company’s break-even point in dollar sales using the equation method and the CM ratio.(Do not round intermediate calculations. Round "CM ratio percent" to nearest whole percent.)
Solve for the company’s break-even point in dollar sales using the formula method and the CM ratio. (Do not round intermediate calculations. Round "CM ratio percent" to nearest whole percent.)
Ch 5: E 5,6,7
instructions | helpExplanation / Answer
Selling price= $22 per unit
Variable expense= $19.36 per unit
Contribution = 22-19.36 = 2.64 per unit
Fixed expense = $4,488
Break-Even Point = fixed cost / contribution per unit
= $4488 / 2.64
= 1700
CM ratio = contribution / selling price per unit
= 2.64 / 22 * 100 = 12%
Break-Even Point (in $) = fixed cost / contribution Margin
= $4488 / 0.12
= $37,400
px = vx + FC + Profit
Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.
Calculation
BEP in Sales Units
At break-even point the profit is zero therefore the CVP formula is simplified to:
px = vx + FC
Solving the above equation for x which equals break-even point in sales units, we get:
Break-even Sales Units = x = = FC / (p-c)
Breakeven Point in Sales Units (x)
= 4,488 ÷ (22 19.34)
= 1,700 units
BEP in Sales Dollars
Break-even point in number of sales dollars is calculated using the following formula:
Break-even Sales Dollars = Price per Unit × Break-even Sales Units
Break-even Point in Sales Dollars = $22 × 1,1700 = $37400
px = vx + FC + Profit