Question

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company's annual fixed costs are $562,500. 

1. Prepare a contribution margin income statement for Blanchard Company showing sales, variable costs, and fixed costs at the break-even point. 

2. If the company's fixed costs increase by $135,000, what amount of sales (in dollars) is needed to break even?
   

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company's annual fixed costs are $562,500. Management targets an annual pretax income of $1,012,500. Assume that fixed costs remain at $562,500. Compute the (1) unit sales to earn the target income and (2) dollar sales to earn the target income.

Answer 1

We are given,
Selling Price per unit = $180
Variable costs per unit = $135
Annual Fixed Costs = $562,500
Working Notes :-
Contribution margin per unit = Selling Price - Variable Costs = $180 - $135 = $45 per unit
Break Even Point (in units) = Fixed Costs / Contribution margin per unit = $562,500 / $45 = 12500 units
Contribution margin Ratio = Contribution margin per unit / Selling price = $45 / $180 = 25%
Break Even Point ( in $) = Fixed Costs / Contribution margin ratio = $562,500 / 25% = $2,250,000
Variable Costs = 12,500 * $135 = $1,687,500

Solution:-

1. Contribution Margin Income Statement at Break Even Point

   Particulars	Amount (in $)
   Sales	2,250,000
   (-) Variable Costs	1,687,500
   Contribution margin	562,500
   (-) Fixed Costs	562,500
   Net Earnings	0

2. Amount of Sales ( in $) to break even when fixed costs increases by $135,000
   Revised Fixed Costs = $562,500 + $135,000 = $697,500
   Break Even Point (in units) = Fixed Costs / Contribution margin per unit
   = $697,500 / $45 = 15500 units
   Sales (in $) = 15500* $180 = $2,790,000
   
   Alternatively,
   Sales (in $) = Fixed Costs / Contribution margin ratio = $697,500 / 25% = $2,790,000

When we have the annual pre-tax income = $1,012,500
Fixed Cost = $562,500

1. Unit Sales to Earn the target income = (Fixed Costs + Target Profit) / Contribution Margin p.u.
   = ($562,500 + $1,012,500 ) / $45
   = 35,000 units
2. Dollar Sales to Earn the target income = (Fixed Costs + Target Profit) / Contribution Margin ratio
   = ($562,500 + $1,012,500 ) / 25%
   = $1,575,000 / 25%
   = $ 6,300,000