I need the break even analysis. Cost Classification: The Lee’s have provided you
ID: 2785802 • Letter: I
Question
I need the break even analysis.
Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY.
A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.
B. Explain the importance of distinguishing between variable and fixed costs.
C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information.
Cost of goods sold of $35 per unit
Labor = $400/month
One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.
Advertising fees = $3,000
Bank fees = $200
Phone/internet = $150 per month
Shipping = $3 per unit
Utilities = $100 per month
Office Supplies = $900
Conference Exhibitor Fee = $3000
Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200
7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)
Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit and the total contribution margin?
Explanation / Answer
7a) The question specifically asks for the break even analysis.
The break even point is the point of 0 profit or loss. The formula to find break even point is:
px=vx+FC…..(1)
where x= number of units produced
p=price per unit
v=Variable Cost
FC=Fixed Cost
First lets classify the components as variable and fixed costs. Fixed costs are costs that remain the same irrespective of production output like rent, advertising, insurance, etc. Variable Costs are costs that vary with the level of production.
Fixed Cost
$
Labor (400×12)
4800
Part Time Employee (40×10×12)
4800
Advertising Fees
3000
Bank Fees
200
Phone/Internet (150×12)
1800
Utilities(100×12)
1200
Office Supply
900
Exhibitor Fee
3000
Travel Expense for Conference
1200
Sum
20900
Variable Cost
$
Cost of Goods Sold
35
Shipping
3
Sum
38
Kindly note labor and employee costs are treated as fixed costs as they are independent of the level of production. If labor costs was dependent on level of production it would be variable cost.
We are also provided that the selling price per unit is $ 85. We need to find the optimal quantity (x) to breakeven. So rearranging equation 1 in terms of x we get:
x=FC/(p-v)
=20900/(85-38)
=20900/47
=444.68 units= 445 units (rounded off)
7b) Next the question asks for contribution margin per unit. Contribution margin per unit represents what proportion of sales revenue is used in covering of fixed costs after variable costs are paid off.
Contribution Margin per Unit=Revenues per unit-Variable Expenses per unit
=85-38
=47
Therefore, we can say that $ 47 from each unit sale will be used in paying off the fixed cost of $ 20900.
7c) The total contribution margin is just an extension of contribution margin per unit. Instead of per unit it takes into account the entire revenue and variable costs. It is often expressed as a percentage:
(Revenue-Variable Costs)/Revenue
=(85×444.68)-(38×444.68)/(85×444.68)
=37797.87-16897.87/37797.87
=20900/377797.87
=0.5529=55.29%
Fixed Cost
$
Labor (400×12)
4800
Part Time Employee (40×10×12)
4800
Advertising Fees
3000
Bank Fees
200
Phone/Internet (150×12)
1800
Utilities(100×12)
1200
Office Supply
900
Exhibitor Fee
3000
Travel Expense for Conference
1200
Sum
20900