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Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:
Sales (12,800 units × $20 per unit) $ 256,000
Variable expenses 128,000
Contribution margin 128,000
Fixed expenses 143,000
Net operating loss $ (15,000 )

Compute the company's CM ratio and its break-even point in both units and dollars.

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Answer:

The company's CM ratio: 0.5

Its break-even point in units: 14,300 units and in dollars:  $286,000

Explanation:

Variable expense per unit = Variable expenses/ number of units = $128,000/12,800 = $10

The contribution margin ratio is calculated by using following formula:

Contribution margin ratio = (Sales - Total Variable cost)/Sales  = ($256,000 - $128,000)/$256,000 = 0.5

The break-even point is the level of production at which the costs of production equal the revenues for a product and calculated by using following formula:

Break-even point in units = Fixed expense/(Selling price per unit-Variable expense per unit) =  $143,000/($20 - $10) = 14,300 units

Break-even point in dollars = 14,300 units x Selling price per unit = 14,300 x $20 = $286,000

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