Problem 5-20 I\'d like help with the following problem, but please explain how y

Question

Problem 5-20

I'd like help with the following problem, but please explain how you arrive at your answers. Thank you.

Problem 5-20 Basics of CVP Analysis; Cost Structure [LO1, LO3, LO4, LO5, LO6]
Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very
erratic, with some months showing a profit and some months showing a loss. The company's
contribution format income statement for the most recent month is given below:
Sales           (12,900 units at $40 per unit)      $ 516,000
Variable expenses                                              309,600
Contribution margin                                            206,400
Fixed expenses                                                   230,400
Net operating loss                                             $ (24,000)

Required:
1. Compute the company's CM ratio and its break-even point in
both units and dollars. (Omit the "%" and "$" signs in your
response.)
CM ratio %
Break-even point in units
Break-even point in dollars $

Explanation / Answer

It is given in the question that contribution = 206400 and sales = 516000

a) Contribution Margin ratio = (Contribution Margin/Sales)*100

= (206400/516000)*100

= 40%

b) Break-even point in units

Break even point is a point where company is in a position of no profit no loss.

So, At Breakeven point

Contribution=Fixed Cost

It is clear from the question that selling price is $40 , so contribution per unit is 40% of $40

i.e 40*0.4 = 16

So for generating 230400 contribution , company have to sell

=230400/16

= 14400 Units

c) As clear from point b that break even point in Units is 14400 units , so break even point in $ will be

14400*40= $576000

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