Question

Pinocchio Company makes wooden puppets and is trying to evaluate their current quarter breakeven point in order to estimate next quarter’s breakeven given that sales are fairly steady throughout the year. Here are the current facts: variable costs are 70% of sales; sales for the last quarter were $300,000; fixed costs consist of $10,000 in building costs, $30,000 in salaries, $5,000 in insurance and $5,000 in advertising; for each of the last three quarters, the margin of safety has been $80,000. What is Pinocchio’s break even in sales dollars?

Answer 1

Variable cost = 70% of sales

Contribution margin ratio = 100% - Variable cost ratio

= 100% - 70%

= 30%

Total fixed costs = Building cost + Salaries + Insurance + Advertising

= 10,000 + 30,000 + 5,000 + 5,000

= $50,000

Break even sales in dollars = Fixed cost/Contribution margin ratio

= 50,000/30%

= $166,667 (rounded to whole dollar)

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