Question

Ritchie Manufacturing Company makes a product that it sells for $150 per unit. The company incurs variable manufacturing costs of $76 per unit. Variable selling expenses are $14 per unit, annual fixed manufacturing costs are $352,000, and fixed selling and administrative costs are $266,000 per year. Required Determine the break-even point in units and dollars using each of the following approaches: a. Use the equation method. b. Use the contribution margin per unit approach. c. Use the contribution margin ratio approach. d. Prepare a contribution margin income statement for the break-even sales volume Complete this question by entering your answers in the tabs below. Req A to C Req D Determine the break-even point in units and dollars using the equation method, the contribution margin per unit approach and the contribution margin ratio approach. Break-even point in units Break-even point in dollars Contribution margin per unit Break-even point in units Break-even point in dollars Contribution margin ratio Break-even point in units Break-even point in dollars Req A to C ReqD Prepare a contribution margin income statement for the break-even sales volume. RITC RITCHIE MANUFACTURING COMPANY Contribution Margin Income Statement Net income (loss)

Answer 1

Ans. A	Equation method:
	We assumed that the break even units are X.
	On the break even level of sales the net income of the company is $0.
	Break even is the level of activity on which the firm does not generate profit or occur any loss.
	So, the Profit is zero which is equal to the difference of Contribution margin and fixed cost.
	(Break even quantity * Selling price) - (Break even quantity * Variable cost per unit) - Fixed cost = Net income
	(X * $150) - (X * $90) - $618,000 =   $0
	$150 X - $90 X - $618,000 = $0
	$150 X - $90 X =   $618,000
	$60 X =   $618,000
	Break even quantity (X) = $618,000 / $60
	10,300 units
	Break even point in dollars = (Variable cost per unit * Break even quantity) + Fixed cost + Net income
	($90 * 10,300) + $618,000 + $0
	$927,000 + $618,000 + $0
	$1,545,000
Ans. B	Contribution Margin Per Unit Approach:
	*Contribution margin per unit   = Selling price per unit - Total variable expenses per unit
	$150 - $90
	$60 per unit
	Break even point in units   =    Total fixed cost / Contribution margin per unit
	$618,000 / $60
	10,300 units
	Break even point in dollars = Total fixed cost / (Contribution margin per unit / Selling price per unit)
	$618,000 / ($60 / $150)
	$618,000 / 0.40
	$1,545,000
Ans. C	Contribution Margin Ratio Approach:
	Contribution margin ratio   =   Contribution margin per unit / Selling price * 100
	$60 / $150 * 100
	40.00%
	Break even point in units   =    Total fixed cost / (Selling price * Contribution margin ratio)
	$618,000 / ($150 * 40%)
	$618,000 / $60
	10,300 units
	Break even point in dollar sales =   Fixed cost / Contribution margin ratio
	$618,000 / 40%
	$1,545,000
Ans. D	RITCHIE MANUFACTURING COMPANY
	Contribution Margin Income Statement
		Total
	Sales (10,300 * $150)	$1,545,000
	Variable expenses (10,300 * $90)	-$927,000
	Contribution margin	$618,000
	Fixed expenses	-$618,000
	Net operating income	$0
	P   =   price per unit
	V = variable cost per unit
	*Working Notes:
	*Calculations of Total variable expenses per unit :
	Total variable expenses per unit = Variable manufacturing cost per unit - Variable selling expense per unit
	$76 + $14   = $90 per unit
	*Calculations of Total Fixed Cost :
	Total fixed cost = Fixed manufacturing cost - Fixed selling and administrative cost
	$352,000 + $266,000   =    $618,000