Question

Sandhill Monograms sells stadium blankets that have been monogrammed with high school and university emblems. The blankets retail for $50 throughout the country to loyal alumni of over 2,100 schools. Sandhill’s variable costs are 41% of sales; fixed costs are $118,000 per month.

Assume that variable costs increase to 47% of the current sales price and fixed costs increase by $10,000 per month. If Sandhill were to raise its sales price by 11% to cover these new costs, what would be the new annual breakeven point in sales dollars?

Answer 1

Solution:

First, we calculate contribution margin and break even point, before the increase in selling price, variable costs ratio and fixed costs:

Account	Per unit	Ratio
Selling price	$50	100%
Variable cost	$20.50(50 ×41%)	41%
Contribution margin	$29.5	59%

Original Break - even point:

Fixed cost	$118,000
Contribution margin	59%
Break -even point (in $)	200,000(118,000/59%)

Now, we calculate contribution margin and break even point after increasing selling price, variable costs ratio and fixed cost:

Account	Per Unit	Ratio
Selling price (50 ×11%)	$55.5	100%
Variable costs(55.5 × 47%)	$26.085	47%
Contribution margin	$29.415	53%

New Break - even point:

Fixed cost	$128,000($118,000+10,000)
Contribution margin ratio	53%
Break even point (in $)	$241509.43($128,000/53%)