In 2016, Novak Company had a break-even point of $570,000 based on a selling pri

Question

In 2016, Novak Company had a break-even point of $570,000 based on a selling price of $10 per unit and fixed costs of $256,500. In 2017, the selling price and the variable costs per unit did not change, but the break-even point increased to $725,000. Collapse question part (a) Compute the variable costs per unit and the contribution margin ratio for 2016. (Round Variable cost per unit to 2 decimal places, e.g. 2.25 and Contribution margin ratio to 0 decimal places, e.g. 20.) Variable costs per unit $ Contribution margin ratio

Explanation / Answer

(a) Break Even Point = Fixed Cost / Contribution Margin Ratio

or $ 570,000 = $ 256,500 /  Contribution Margin Ratio

or  Contribution Margin Ratio = $ 256,500/ $ 570,000

= 45%

Hence the Contribution margin ratio ( for 2016) = 45%

Contribution margin ratio = 45% of Selling Price Per Unit

Hence, Variable cost per unit= (100% *-45% ) * Selling Price Per Unit

= 55% of Selling Price Per Unit

= 55% * $ 10

= $ 5.50

Hence the Variable costs per unit(for 2016) = $ 5.50

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