Question

Riveria Co. makes and sells a single product. The current selling price is $39 per unit. Variable expenses are $17 per unit, and fixed expenses total $39,000 per month. Sales volume for May totaled 4,570 units. Required: a. Calculate operating income for May. b. Calculate the break-even point in terms of units sold and total revenues. (Round your intermediate calculations to the nearest whole dollar.) Break-even volume unit Break-even revenues c. Management is considering installing automated equipment to reduce direct labor cost. If this were done, variable expenses would drop to $11 per unit, but fixed expenses would increase to $63,600 per month c-1. Calculate operating income at a volume of 4,570 units per month with the new cost structure.

Answer 1

a)

Sales (4,570*$39)	$ 178,230
Less: Variable expenses (4,570*$17)	$    77,690
Less: Fixed expenses	$    39,000
Operating income	$    61,540

b)

Break-even point in units = Fixed expenses / Contribution margin per unit

Break-even point in units = $39,000 / ($39-$17)

Break-even point in units = 1,773 Units

Break-even point in dollars = Break-even point in units * Selling price per unit

Break-even point in dollars = 1,773*$39

Break-even point in dollars = $69,136

c1.

Sales (4,570*$39)	$ 178,230
Less: Variable expenses (4,570*$11)	$    50,270
Less: Fixed expenses	$    63,600
Operating income	$    64,360

c2.

Break-even point in units = Fixed expenses / Contribution margin per unit

Break-even point in units = $63,600 / ($39-$11)

Break-even point in units = 2,271 Units