Question

Calculate the following information for Rudolph's Snowmobile Rentals Ine Total fixed costs Unit sales price Unit variable cost $7,800 $200 per hour S 50 per hour a) Compute the contribution margin per rental hour. Sales Vaviabit cost b) Compute the contribution margin ratio. c) Compute the break-even point in hours. d) Compute the break-even point in sales dollars. e) Calculate the hours needed to earn S29,700 in operating income.

Answer 1

Total fixed cost = $7,800

Selling price = $200 per hour

Variable cost = $50 per hour

(a)

Contribution margin = Selling price - Variable cost

= 200 - 50

= $150 per hour

(b)

Contribution margin ratio = Contribution margin/Selling price

= 150/200

= 75%

(c)

Break even point = Fixed cost/Contribution margin

= 7,800/150

= 52 hours

(d)

Break even point ($) = Fixed cost/Contribution margin ratio

= 7,800/75%

= $10,400

(e)

Units to be sold to get a target profit = (Fixed cost + Target profit)/Contribution margin

Hence, hours needed to get an operating income of $29,700 = (7,800 + 29,700)/150

= 250 hours

(f)

Contribution margin = Selling price - Variable cost

= 180 - 50

= $130 per hour

Break even point = Fixed cost/Contribution margin

= 7,800/130

= 60 hours

(g)

Units to be sold to get a target profit = (Fixed cost + Target profit)/Contribution margin

Hence, hours needed to get an operating income of $29,700 = (7,800 + 29,700)/130

= 288.46 hours

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