13. a. What is the formula for breakeven units?
b. How is knowledge of the contribution margin of a product helpful?
In your answer, explain two possible benefits of computing the contribution margin of a product.
14. Plunda Co. is planning production for the coming year. The information to be used is based on a
projection of cost information for the current year. Projections of the following costs are as follows:
Variable costs per unit:
Direct materials
$15.80
Direct labor
11.60
Overhead
18.40
Selling costs
8.20
Fixed cost estimates:
Production costs
$212,400
Selling and administrative costs
417,600
Plunda Co. sells its product for $90.00 per unit. Compute the following, showing your calculations:
a. The breakeven point in sales units
b. The breakeven point in sales dollars
c. The sales level in both sales units and dollars if a profit of $122,400 is projected
15. a. Provide two different ways of computing breakeven units: one with the contribution margin in the
computation and one without the contribution margin.
b. Compare and contrast the two different methods of computing breakeven units. Does the use of the
contribution margin alter the resulting number of breakeven units? Why or why not?
c. Comment on how the contribution margin affects the computation of breakeven units. Would an
increase in the contribution margin increase or decrease the number of breakeven units required?
16. Martin, Inc., has two products: a pocket metronome (unit sales price, $25; unit variable cost, $15) and
a pocket tuner (unit sales price, $14; unit variable cost, $9). The company’s sales mix of the pocket
metronome to the pocket tuner is 4:1 and fixed costs are $32,850.
a. Determine the weighted-average contribution margin.
b. Calculate the weighted-average breakeven point.
c. Compute the breakeven point for each product.
17. A digitized music tuner has been a staple in Smooth Sounds’ product line for several years. Annual
fixed costs of production and administration related to this product in the past have been $643,500.
Variable costs of production and sales have been $17 per unit. The selling price in the past has been
$28 per unit. Based on the appearance of competing products on the market, management has asked
you to do the following:
a. Compute the breakeven point in units and sales dollars for the present product.
b. Compute the breakeven point in units and sales dollars if the variable costs increased by $3 per unit
and the fixed costs increased by $14,375 per month.
c. Using the information from (b), an expected additional monthly advertising charge of $10,000, and a
monthly sales rate of 15,000 units, compute the competitive selling price that the company must obtain
in order to have a profit of $32,000 per month.
18. A new product, an easy to store guitar stand, is being planned, with the following cost estimates:
variable cost per unit, $9, and total fixed costs, $58,000. The projected sales price is $13 each.
a. Using the contribution margin approach, compute the number of units that must be sold to break
even.
b. Using the same approach and assuming that fixed costs can be reduced by $8,000, how many units
must be sold to produce a profit of $65,000?
c. Given the original information and the projection that 50,000 units can be sold, compute the selling
price that the producer must use to obtain a profit of $150,000.
Breakeven (units)
= FC ÷ CM per unit
= $658,000 ÷ 50,000
19. Meredith Marshall owns a home inspection business, offering her services to homeowners. She
currently charges $180 per inspection but wants to know if her fee should be raised. She has provided
the following data from the past six months:
Month
Number of
Inspections
Overhead
Costs
March
60
$3,420
April
64
3,555
May
76
3,989
June
90
4,044
July
97
4,101
August
110
4,120
Meredith takes her daughter with her on all inspections and pays her $40 per inspection. Due to slower
business in the cooler months, Meredith estimates she will average 60 inspections per month for the
next six months. Prepare a schedule showing Meredith ‘s estimated total cost per inspection.
20. Is breakeven analysis a tool that can be used for a service-oriented business? Explain your answer.
21. J & C Stacy Enterprises is expecting to earn a profit of $180,000 in 20xx. The company manufactures
wrought iron lamps. Each lamp requires variable costs of $13 for direct materials, $9 for direct labor,
and $12 for overhead. Total variable costs are thus $34 per lamp. Fixed costs for 20xx are expected to
be $630,000. Each lamp will sell for $79.
a. Determine how many lamps the company must sell to earn its targeted profit, and convert this
amount to sales dollars.
b. Compute breakeven sales in dollars.
c. Explain the dollar difference between breakeven sales dollars and the sales dollars necessary to earn
the targeted profit. Use the contribution margin as part of your explanation.
22. Ryan’s Landscaping sells a quality brand of hoes, shovels, and rakes in a sales mix of 2:4:2. The
company’s fixed costs are $61,600. Product data include the following:
Unit Sales
Price
Unit Variable
Costs
Hoes
$12
$8
Shovels
15
7
Rakes
16
8
a. Compute the weighted-average contribution margin.
b. Determine the weighted-average breakeven point.
c. Calculate the breakeven point for each product.
d. Determine the breakeven point in sales dollars.
= 18,000 $79 (sales price per unit)
23. Projected cost information for a new product to be produced by Kolier Manufacturing is as follows:
Expected variable unit costs:
Direct materials
$10.90
Direct labor
7.18
Overhead
1.92
Selling costs
4.00
Annual fixed costs:
Taxes on property used
$ 8,870
Depreciation on building and equipment
18,920
Advertising
38,840
Other
2,070
The product is to be sold for $49.
a. Compute the number of units that must be sold to earn a profit of $80,000.
b. Compute the number of units that must be sold if advertising costs rise by $12,000 and a targeted
profit of $120,000 is to be obtained.
c. Use the original information and sales of 10,000 units to compute the new selling price that the
company must use to obtain a profit of $200,000.
d. The most in annual sales that could be projected is 20,000 units. Determine the added amount that
could be spent on fixed advertising costs if the highest possible selling price that management believes
can be charged is $50 and if there is a targeted profit of $225,000.
(2,200 units $12) = $ 26,400
(4,400 units $15) = 66,000
(2,200 units $16) = 35,200
24. Loren, Inc., sold 30,000 units of its product last year with the following results:
Sales revenue
$900,000
Variable costs
630,000
Fixed costs
190,000
Operating income
$ 80,000
The company expects variable costs to increase by $4.00 per unit this year.
a. Assuming the unit sale price remains constant, compute the unit contribution margin and the
contribution margin ratio for this year.
b. Given the expected change in variable costs, how many units will have to be sold this year to earn
the same operating income as last year?
c. Assuming the company is willing to raise the unit sales price but wants the contribution margin to be
the same as last year, determine the unit sales price the company must charge to cover the expected
increase in variable costs.
= P
(where X equals amount available for fixed advertising costs.)
= $225,000
= X
= X
25. If James, Inc., sells 300 widgets at $50 per widget and has variable costs of $20 per widget and fixed
costs of $4,000, what is the projected profit?
26. Indicate whether each of the following costs of productive output is usually variable (V) or fixed (F):
a. Machine operator’s hourly wages
b. City operating license
c. Machine helper’s wages
d. Wiring used in radios
e. Indirect materials
f. Property insurance
g. Gasoline for delivery truck
h. Real estate taxes
27. Native American Pottery expects to earn a profit of $95,000 in 20xx. The company manufactures
ornamental ceramic tiles. Each lot of 100 blocks requires variable costs of $5.00 for direct materials,
$3.50 for direct labor, and $4.50 for overhead. Total variable costs are thus $13 per lot. Fixed costs for
20xx are expected to be $130,000. Each hundred-block lot will sell for $33.
a. Determine how many lots of ceramic tiles the company must sell to earn its targeted profit, and
convert this amount to sales dollars.
b. Compute breakeven sales in dollars.
c. Explain the dollar difference between breakeven sales dollars and the sales dollars necessary to earn
the targeted profit. Use the contribution margin as part of your explanation.
28. Ben & Harry Co. sold 100,000 units last year with the following results:
Sales revenue
$400,000
Variable costs
160,000
Contribution margin
$240,000
Fixed costs
100,000
Operating income
$140,000
= 11,250 $33 (sales price per unit)
Breakeven
= $130,000 ÷ $20
= 6,500 $33
Difference in sales amounts
units: 4,750 units $13 per unit
a. Management thinks that a 5 percent reduction in the unit sales price and a $31,000 increase in fixed
advertising costs will create a 30 percent increase in unit sales. Assess this proposal and make a
recommendation on what action should be taken.
b. Assume that the marketing manager thinks that the unit sales price should not be changed. Instead,
he recommends a $0.40 per unit increase in sales commissions coupled with some increase in
advertising to generate the 30 percent increase in unit sales and a 20 percent increase in operating
income. Assess this proposal and determine the maximum amount of money that can be spent on
advertising if the targeted profit is to be achieved.