ABC. Corp. has estimated the following income statement for its next fiscal year

Question

ABC. Corp. has estimated the following income statement for its next fiscal year.

Sales                                    20,000,000

variable costs                        6,000,000

revenue before fixed costs 14,000,000

fixed costs                             9,000,000

ebit                                         5,000,000

interest expense                      900,000

earnings before taxes          4,100,000

taxes (35%)                          1,435,000

net income                             2,665,000

a. what is the break-even point in sales dollars for the firm?

b. if the average unit cost is $20, what is the break even point in units?

Explanation / Answer

a. what is the break even point in sales dollars for the firm?

Contribution Ratio = 14000000/20000000 = 70%

Break even point in sales dollars = Fixed Cost/Contribution Ratio

Break even point in sales dollars = 9,000,000/70% = $ 12,857,142.86

b. if the average unit cost is $20, what is the break even point in units?

average unit cost= Total cost/no of Unit

No of Unit produce & Sold = (9000000+6000000)/20 = 750,000 unit

Sale price per unit = 20000000/750000 = $ 26.67

Variable cost per unit = 6,000,000/750000 = $ 8

Contribution Margin = 18.67

Break even point in units = Fixed Cost/Contribution Margin per unit

Break even point in units = 9,000,000/18.666666 = 482142.90 Unit   

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