Break-Even in Sales Revenue, Changes in Variables Carmichael Corporation is in t
ID: 2483239 • Letter: B
Question
Break-Even in Sales Revenue, Changes in Variables
Carmichael Corporation is in the process of preparing next year’s budget. The pro forma income statement for the current year is as follows:
Required:
1. What is the break-even sales revenue for Carmichael Corporation for the current year? In your calculations, carry the contribution margin ratio to two decimal places.
$
2. For the coming year, the management of Carmichael Corporation anticipates an 8 percent increase in variable costs and a $60,000 increase in fixed expenses. What is the break-even point in dollars for next year? In your computation, round the contribution margin ratio to four decimal places. Round your final answer to the nearest dollar. (CMA adapted)
$
Explanation / Answer
Answer to Part (1)
Total Fixed Cost = Fixed Overhead + Fixed Selling & Admin Expenses
= $100,000 + $350,000
= $450,000
Total Variable Cost = Direct materials + Direct Labor + Variable Overhead + Variable Selling & Admin expense
= $250,000 + $180,000 + $106,000 + $400,000
= $936,000
Total Sales = $1,800,000
Contribution Margin Ratio = (Sales-Variable Cost)/Sales
= ($1,800,000-$936,000)/$1,800,000
= 48%
Break-even Sales Revenue = Fixed Cost/Contribution Margin Ratio
= $450,000/48%
= $937,500
Answer to Part (2)
New Total Fixed Cost = $450,000 + $60,000 = $510,000
New Variable Cost = $936,000*1.08 = $1,010,880
New Contribution Margin Ratio = ($1,800,000-$1,010,880)/$1,800,000 = 43.84%
New Break even sales revenue = $510,000/43.84% = $1,163,321