Question

Q.1

Rooney Corporation produces products that it sells for $18 each. Variable costs per unit are $9, and annual fixed costs are $189,900. Rooney desires to earn a profit of $33,300.

Required

1. Use the equation method to determine the break-even point in units and dollars.

2. Determine the sales volume in units and dollars required to earn the desired profit.

a. Break-even point in units Break-even point in dollars b. Sales volume in units Sales in dollars

Answer 1

The correct answer is:

a.	Break Even Point in units	21,100
	. Break Even Point in dollars	$ 379,800
b.	Sales volume in units	24,800
	Sales in dollars	$ 446,400

Notes:

a. Break Even Point in units = Fixed Cost / Contribution Margin Per Unit

= $ 189,900 / ( Selling Price - Variable Cost)

= $ 189,900 / ( $ 18 - $ 9)

= 21,100 units

Contribution Margin Ratio = Contribution Margin / Selling Price

= $ 9 / $ 18* 100

= 50%

Break Even Point in dollars= Fixed Cost / Contribution Margin Ratio

= $ 189,900 / 50%

= $ 379,800

b. Required profit = $ 33,300

Fixed Cost = $ 189,900

Required Contribution Margin = Required profit + Fixed Cost

= $ 33,300 + $ 189,900

= $ 223,200

Contribution Margin Per Unit = $ 9

Sales volume required to earn target profit (in units) = Required Contribution Margin / Contribution Margin Per Unit

= $ 223,200 / $9

= 24,800 units

Sales volume required to earn target profit (dollars) = Required Contribution Margin / Contribution Margin Ratio

= $ 223,200 / 50%

= $ 446,400