Question

Head-First Company now sells both bicycle helmets and motorcycle helmets. Next year, Head- First expects to produce total revenue of $575,000 and incur total variable cost of $400,000. Total fixed cost is expected to be $60,500.

	Required:
1.	Calculate the break-even point in sales dollars for Head-First. Round the contribution margin ratio to four decimal places and sales to the nearest dollar.
2.	Check your answer by preparing a contribution margin income statement.

Answer 1

1. Break even point in sales dollar = Fixed cost / Contribution margin ratio

Fixed cost = $60,500

Contribution margin ratio = (Sales - Variable costs) / Sales

= ($575,000 - $400,000) / $575,000

= $175,000 / $575,000

= 30.4348%

Break even point in sales dollar = $60,500 / 30.4348%

= $198,786

2.

Contribution margin income statement

Sales	$198,786
(-) Variable cost*	$138,286
Contribution margin	$60,500
(-) Fixed costs	$60,500
Profit	0

*Variable cost = $400,000 * ($198,786 / $575,000)

= $138,286