Chapter 2: Q7-13OQ (page 161)

Owen Conner works part-time packaging software for a local distribution company in Indiana. The annual fixed cost is $10,000 for this process, direct labor is $3.50 per package, and material is $4.50 per package. The selling price will be $12.50 per package. How much revenue do we need to take in before breaking even? What is the break-even point in units?

Short Answer

Expert verified

Revenue before break-even $27778.

Break-even point 2,222 units.

Step by step solution

Definition of break-even

Breaking even is a situation of no profit, no loss or the situation when cost and income are the same.

Using the formula to evaluate break-evenrevenue

$\begin{matrix} Break even revenue = \frac{Fixed cost}{Contribution margin ratio} \\ Contribution margin ratio = \frac{Contribution margin}{Total revenue} \end{matrix}$

Calculating the contribution margin

$\begin{matrix} Contribution margin =Revenue per unit - Variable cost per unit \\ =12.50 - (3.50 + 4.50) \\ = 12.50 - 8 \\ = 4.50 \end{matrix}$

Calculating contribution margin ratio

$\begin{matrix} Contribution margin ratio = \frac{4.50}{12.50} \\ = 0.36 \end{matrix}$

Step 5: Calculating break-even revenue

$\begin{matrix} Breakeven revenue = \frac{Fixed cost}{Contribution margin ratio} \\ = \frac{10, 000}{0.36} \\ = 27, 778 approx. \end{matrix}$

Step 6:Formula for break-even point in unit

$Breakeven point (in units) = \frac{Fixed cost}{Sales price per unit-Variable cost per unit}$

Calculating break-even point in units

$\begin{matrix} Break even point (in units) = \frac{10, 000}{12.50 - (4.50 + 3.50)} \\ = \frac{10, 000}{12.50 - 8} \\ = \frac{10, 000}{4.5} \\ = 2, 222 a p p r o x . \end{matrix}$

Thus,break-even revenue is $27,778 and break-even units is 2,222.

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Short Answer

Step by step solution

Definition of break-even

Using the formula to evaluate break-evenrevenue

Calculating the contribution margin

Calculating contribution margin ratio

Step 5: Calculating break-even revenue

Step 6:Formula for break-even point in unit

Calculating break-even point in units

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