Question

Cabrera Inc. produces and sells bobblehead dolls. Last year, Cabrera sold 156,250 units. The

income statement for Cabrera Inc. for last year is as follows:

Sales $625,000

Less: Variable costs (343,750)

Contribution margin $281,250

Less: Fixed costs (180,000)

Operating income $101,250

Required:

1. Compute the break-even point in units and in revenues. Compute the margin of safety in

sales revenue for last year.

2. Suppose that the selling price decreases by 10 percent. Will the break-even point increase

or decrease? Recompute the break-even point in units. (Round up to the next whole unit)

3. Suppose that the variable cost per unit decreases by $0.25. Will the break-even point

increase or decrease? Recompute the break-even point in units. (Round up to the next

whole unit)

4. Can you predict whether the break-even point increases or decreases if both the selling

price and the unit variable cost decrease? Recompute the break-even point in units

incorporating both of the changes in Requirements 2 and 3. (Round up to the next whole

unit)

5. Assume that total fixed costs increase by $50,000 (Assume no other changes from the

original data). Will break-even point increase or decrease? Recompute it (Round up to next

whole unit).

Answer 1

1	Break Even Point in Units	Fixed Cost
		Sales price per unit - Variable cost per unit
		180000
		1.80
		100000	Units
	Break Even Point in Revenue	100000 X 4
		400000
	Margin of Safety	Actual Sales -Breakeven Point
		Actual Sales
		625000 - 400000
		625000
		36%
2	Break Even Point will Increase if selling price decreases by 10 percent
	Sales per unit	3.60
	Less: Variable Cost	2.20
	Contribution Margin	1.40
	Break Even Point in Units	Fixed Cost
		Sales price per unit - Variable cost per unit
		180000/1.40
		128572	Units
	Break Even Point in Revenue	128572 X 3.6
		462859
3	Breakeven point decrease if the Variable cost is decreased by 0.25
	Sales per unit	4.00
	Less: Variable Cost	1.95
	Contribution Margin	2.05
	Break Even Point in Units	Fixed Cost
		Sales price per unit - Variable cost per unit
		180000/2.05
		87805	Units
4	Breakeven point increase if the Variable cost is decreased by 0.25 and price decreased by 10 percent
	Sales per unit	3.60
	Less: Variable Cost	1.95
	Contribution Margin	1.65
	Break Even Point in Units	Fixed Cost
		Sales price per unit - Variable cost per unit
		180000/1.65
		109091	Units
5	Breakeven point increase if the fixed cost increase by 50000
	Sales per unit	4.00
	Less: Variable Cost	2.20
	Contribution Margin	1.80
	Break Even Point in Units	Fixed Cost
		Sales price per unit - Variable cost per unit
		230000/1.8
		127778	Units