Question

Break even and special order Exercise #3 percent Variable ratio Summit Paintball Supply manufactures paintballs used by recreational gamers. CMR The cost of producing a box of 2,500 paintballs is as follows: Sales per box $ 125.00 unit Direct materials variable 12.50 Direct labor fixed 6.25 Variable factory overhead total 18.75 Fixed factory overhead 25.00 CM per unit Variable selling, general, and administrative costs 18.75 Fixed selling, general, and administrative costs 4.00 Total cost per unit $ 85.25 The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. What are the total fixed costs per year? A. What is the breakeven point in sales $ c Management has received a special order request for 100,000 boxes of "private label" paintballs. The order specifies a per box price of $75 Should management accept the offer? Why?

Answer 1

A. Total fixed cost per year = $11,600,000

Solution :

Total fixed cost = total fixed factory overhead + total fixed SG and A.

=($25×400000) + ($4×400000)

= $10,000,000. + $1600000

= $11,600,000

B . Break even sales in $ =

Break even sales in $= total fixed cost /CM ratio

Where,

CM ratio = (contribution margin per box /sales per box) ×100

Contribution margin per box = sales per box - total variable cost per box.

= $125 - ($85.25 - $25 -$4)

= $125 - $56.25

= $68.75

CM ratio = ($68.75/$125)×100

= 55%

Therefore,

Break even sales in $ = $11,600,000/55%

= $21090909

C. Should management accept the order ? = No

Because the acceptance of special order results in net loss of $1025000.

Solution :

Profit /(loss) per box = total sales per box - total cost per box

= $75 - $85.25

= ($10.25)

Total loss From special order = $10.25 × 100000 = $1025000