Question

Question: Business Solutions sells upscale modular desk units and office chairs in the ratio of 3:2 (desk unit: chair). The selling prices are \(1,250 per desk unit and \)500 per chair. The variable costs are \(750 per desk unit and \)250 per chair. Fixed costs are $120,000.

Required

1. Compute the selling price per composite unit.

2. Compute the variable costs per composite unit.

3. Compute the break-even point in composite units.

4. Compute the number of units of each product that would be sold at the break-even point.

Short answer

1. The total selling price per composite unit is $4,750.
2. The total variable cost per composite unit is $2,750.
3. The total break-even point per composite unit is 60 units.
4. Break-even point in units for each product: Desk unit: 180 units, Chair: 120 units.

Step-by-step solution

Definition of Break-Even Units

The units a business entity must sell to cover all the costs incurred in the business (fixed and variable) are known as break-even units.

Selling price per composite unit

Product	Selling price	X	Proportion	=	Composite selling price
Desk unit	$1,250	X	3	=	$3,750
Chair	$500	X	2	=	$1,000
					$4,750

Variable cost per composite unit

Product	Variable cost	X	Proportion	=	Composite variable cost
Desk unit	$750	X	3	=	$2,250
Chair	$250	X	2	=	$500
					$2,750

Break-even point in composite units

Particular	Amount $
Selling price per composite unit	$4,750
Less: Variable cost per composite unit	(2,750)
Contribution margin per composite unit	$2,000

$\begin{array}{rcl}\mathbf{\text{Break-evenpointpercompositeunit}}& \mathbf{=}& \frac{\mathbf{\text{Fixedcost}}}{\mathbf{\text{Contributionmarginpercompositeunit}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{60}\mathbf{}\mathbf{\text{units}}\end{array}$

Each unit of product that will be sold to achieve the break-even point

Product	Break-even per composite unit	X	Proportion	=	Break-even point in units of each product
Desk unit	60	X	3	=	180 units
Chair	60	X	2	=	120 units
					300 units