Sales revenue $40,000 Incremental Variable cost $16,000 Nonincremental Fixed cos

Question

Sales revenue $40,000
Incremental Variable cost $16,000
Nonincremental Fixed cost $20,000
[Note: you can assume that variable costs are constant so that the average of them is also the variable cost relevant for a change in sales.]

The company is enjoying stable demand with its current pricing, but management is looking for ways to increase profitability. One suggestion is that the company reposition its water as a premium product, justifying a higher price. If successful, the company believes that it could charge 20% more for its water than it does now.


What is the maximum sales loss (in units) that Healthy Spring could tolerate before a 20% price increase would fail to make a positive contribution to its profitability? (That is, what is the basic break-even sales change?)
Please show all calculations. Thank you

Explanation / Answer

First, compute Contrib Margin % Sales - 40,000 VC 16,000 CM 24,000 = 60% Then, compute for Breakeven Sales$$ Fixed Costs/ CM% = 20,000/60% = $33,333 if you have trouble understanding equation with percentage, heres an explanations: To compute for the Breakeven sales in dollars, you have to divide Fixed Costs by the Contribution Margin percentage. You get the contribution percentage by first computing your gross profit i.e. sales less variable costs. The gross profit figure arrived at is divided by your sales hence you get 6o percent as per above thats it!! please dont forget to rate my answer :)

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