Question

Determining the break-even point and preparing a contribution margin income statement Vezinov Company manufactures portable heaters and sells them for $200 each. According to the company's records, the variable costs, including direct labor and direct materials, are $80. Factory depreciation and other fixed manufacturing costs are $960,000 per year. Vezinov pays its salespeople a commission of $20 per unit. Annual fixed selling and administrative costs are $240,000. Required Determine the break-even point in units and dollars, using each of the following: a. Use the equation method. b. Use the contribution margin per unit approach. c. Use the contribution margin ratio approach. d. Confirm your results by preparing a contribution margin income statement for the break-even point sales volume.

Answer 1

Break even point is that level of Sales where the business enters the scenario of neither gain nor loss.

To put it simply, it is that level of Sales where the entity earns just enough Contribution to recover it's Fixed Cost.

(a)BEP using equation method:

Variable Cost per unit =

Direct labor+Direct materials+Commission to salespeople

=$80+$20

=$100 per unit

Fixed Cost =

Fixed Manufacturing costs+Fixed Selling and Administrative costs

=$960000+$240000

=$1200000

Sales per unit =$200

To find BEP,

Let BEP units be X

Sales=Variable Cost +Fixed Cost

$200X=$100X+$1200000

$100X=$1200000

X=12000 units

So,BEP is 12000 units

(b)Using Contribution margin per unit approach

BEP=Total Fixed costs÷Contribution margin per unit

Here, Total Fixed costs are $1200000

Contribution margin per unit

=Sales p.u-Variable Cost p.u=$200-$100=$100

SO, BEP=$1200000÷$100=12000 units

(c)Using Contribution margin ratio approach

BEP=Total Fixed cost÷Contribution margin ratio

Contribution Margin ratio

=Contribution margin÷Sales

Here, Contribution margin ratio=$100÷$200=50%

Total Fixed Cost =$1200000

So,BEP=$1200000÷50%=$2400000

(d)Income Statement at the BEP sales volume

Particulars	Amount($)
1.Sales at BEP(12000u×$200)	$2400000
2.Variable cost(12000u×$100)	$1200000
3.Total Contribution(1-2)	$1200000
4.Total Fixed Cost	$1200000
5.Net Profit(3-4)	0