Perez Company reported the following data regarding the product it sells: Sales price $ 56 Contribution margin ratio 25 % Fixed costs $ 350,000 Required Use the contribution margin ratio approach and consider each requirement separately. What is the break-even point in dollars? In units? To obtain a profit of $42,000, what must the sales be in dollars? In units? If the sales price increases to $70 and variable costs do not change, what is the new break-even point in dollars? In units?

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Dryomys Dryomys · Answer 1 · 2019-10-16T09:56:37+02:00

Answer:

Contribution margin ratio = 1 - variable cost ratio

= 25%

(a) [tex]Break\ even\ in\ dollars=\frac{fixed\ costs}{contribution\ margin}[/tex]

[tex]Break\ even\ in\ dollars=\frac{350,000}{0.25}[/tex]

= 1,400,000

[tex]Break\ even\ in\ units=\frac{Break\ even\ in\ dollars}{sales\ price}[/tex]

[tex]Break\ even\ in\ units=\frac{1,400,000}{56}[/tex]

= 25,000

(b) For profit of $42,000,

[tex]sales=\frac{Profit+fixed\ cost}{contribution\ margin\ ratio}[/tex]

[tex]sales=\frac{42,000+350,000}{0.25}[/tex]

= 1,568,000

[tex]In\ units=\frac{sales}{sales\ price}[/tex]

[tex]In\ units=\frac{1,568,000}{56}[/tex]

= 28,000

(c) variable cost = sales price × variable cost ratio

= $56 × 75%

= $42

New contribution margin = [tex]\frac{New\ sales\ price-variable\ cost}{New\ sales\ price}[/tex]

New contribution margin = [tex]\frac{70-42}{70}[/tex]

= 0.4

= 40%

[tex]New\ Break\ even\ in\ dollars=\frac{fixed\ costs}{contribution\ margin}[/tex]

[tex]New\ Break\ even\ in\ dollars=\frac{350,000}{0.4}[/tex]

= $875,000

[tex]New\ Break\ even\ in\ units=\frac{New\ Break\ even\ in\ dollars}{New\ sales\ price}[/tex]

[tex]New\ Break\ even\ in\ units=\frac{875,000}{70}[/tex]

= 12,500