Question

The three questions use this case: This month, Candel Gym has sales of $800,000, contribution margin of $320,000, fixed cost of $200,000 and operating profit of $120,000.

Q1. What is the breakeven RATIO? ________? The Break-even Sales? $__________________. Use What-If 3-Trials method. Manually sketch your 3 trials in the space provided.

Q2. What is the firm’s Operating Risk Ratio? ____________. Margin of safety ratio to sales [ie., safety ratio]? _____ %

Q3. What is the firm’s operating leverage number? _________ times

Q4. BM Company sells two products, A and B. Product A sells for $15 per unit with variable costs of $10 per unit. Product B sells for $40 per unit with variable costs of $25 per unit. The ratio of total contribution margin to total sales dollars is 35%. Total fixed cost for this period is $140,000. BM Company typically sells four (4) Product A’s for every Product B [= Sales mix ratios are 80% for A, and 20% for B].    

a.   What is the breakeven point in combined total sales revenue dollars?   $_____________

b. Determine the breakeven point in numbers of A and B. Ans: ________ units of A; _________units of B.

Answer 1

1		Per unit
	Sales	$500	$800,000
	Less: Varaible Cost	$300	$480,000
	Contribution margin	$200	$320,000
	Less: Fixed Cost		$200,000
	Net Income		$120,000
	Break-Even Point in Units =	Total Fixed Costs / Contribution Margin per unit
	=	$200,000/$200
	=	1,000	units
	Break-Even Point in Sales =	Total Fixed Costs / Contribution Margin Ratio
	=	$200,000/40%
	=	$500,000
	Contribution margin ratio =	Contribution margin/sales
	=	$320,000/$800,000
	=	40%
2	Operating Risk Ratio =	Operating Expense/Sales
	=	($480,000+$200,000)/$800,000
	=	85%
	Margin of safety =	(Actual Sales - Break-Even Point)/Actual Sales
	=	($800,000 - $500,000)/$800,000
	=	37.50%
3	Firm’s operating leverage =	Contribution/Net Operating Income
	=	$320,000/$120,000
	=	2.67
4
a.	Sales Mix:
	A:B = 8:2
	Break-Even Point in sales=	Fixed Cost / (Weighted Average contribution Margin ratio)
	=	$140,000 / 35%
	=	$140,000 / 35%
	=	$400,000
	Calculation of Break-Even Point:
	Break-Even Point =	Fixed Cost / (Weighted Average contribution Margin)
	=	$140,000 / ($5 x 0.8 + $15 x 0.2)
	=	$140,000 / $7
	=	20,000
	Units Sales of Product A at Break Even Point = 20,000 x 0.8 = 16,000 units
	Units Sales of Product B at Break Even Point = 20,000 x 0.2 = 4,000 units