2. Warner Tool Company President Dr. John Robinson wants to knowthe breakeven po

Question

2. Warner Tool Company President Dr. John Robinson wants to knowthe breakeven     point in sales dollars forhis company. The following is the partial Income Statement for thecompany:

                     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

The formula to compute the Break even point in sales dollars is todivide fixed cost by the contribution margin ratio instead of thecontribution margin per unit. The contribution margin ratioexpresses the contribution margin as a percentage of sales. Tocalculate this ratio divide the total contribution margin by totalrevenues. $148,000/$370,000= $0.40 that is for each dollar of sales there isa 0.40 contribution to covering fixed cost and generating netincome. Using this ratio, we calculate the break-even point salesin dollars. $55,000/$0.40= 137,500

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