BREAKEVEN ANALYSIS PROBLEMS. 1. Warner Tool Company produces class rings to sell

Question

                                               BREAKEVEN ANALYSIS PROBLEMS.

1. Warner Tool Company produces class rings to sell to collegeand high school        students.These rings sell for $75 each, and cost $35 each to produce. WarnerTool Company has fixed costs of $50,000.

a)      Calculate Warner ToolCompany’s breakeven point?

b)      How much profit (loss) will WarnerTool Company have if it sells 1,000 rings? 8000rings?

c)      Warner Tool Company’spresident, Dr. John Robinson expects annual profit of $100,000. Howmany rings must be sold to attain this profit?

2. Warner Tool Company President Dr. John Robinson wantsto know the breakeven     point in salesdollars for his company. The following is the partial IncomeStatement for the company:

                     Sales                         $370,000

                     Variableexpenses     $222,000

                     Contribution Margin $148,000

                     Fixedexpenses          $55,000

                     NetIncome               $ 93,000

Compute the breakeven analysis in sales dollars for thecompany.

Explanation / Answer

Selling Price for each ring   = $75

Variable Cost for each ring = $35

Fixed Cost   = $50,000

(1)

(a)    Calculating Break-even Point (inUnits)

Break-even Point (in units)       =   Fixed Cost / (Unit selling price – unitvariable cost)

           BEP (inunits)               = $50,000 / ($75- $35)

                                                  = $50,000 / $40

           BEP (inunits)              = 1,250 rings

(b)

Sales – VariableCost           = Contribution

                           1,000units * $40       =          $40,000

                       8,000 rings * $40       =         $320,000

                       $320,000 - $50,000    =         $270,000 (Profit)

(C ) Calculating the total rings for theProfit of $100,000:

                       Annual Profit = $100,000

           Contribution – Fixed Cost = Profit (Loss)

           Contribution - $50,000 = $100,000

           Contribution = $100,000 + $50,000

           Total Contribution = $150,000

           Number of rings = $150,000 / $40

           Number of rings = 3,750 rings

(2)       

Break-even Sales ($) = Total Annual Fixed Cost /1-(Annual variable Costs / Total Sales)

Break-even Sales ($) = $55,000 / 1-($222,000 /$370,000)

                                 = $55,000 /(1 - 0.6)

                                 = $55,000 /0.4

Break-even Sales ($) = $137,500

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