Question

Blanchard Company manufactures a single product that sells for \(180 per unit and whose total variable costs are \)135 per unit. The company’s annual fixed costs are \(562,500.

1. Prepare a contribution margin income statement for Blanchard Company showing sales, variable costs, and fixed costs at the break-even point.

2. If the company’s fixed costs increase by \)135,000, what amount of sales (in dollars) is needed to break even? Explain.

Short answer

1. Break-even in units is equal to12,500.
2. The Break-even point in the dollar equals$2,790,000 when the fixed cost increases by $135,000.

Step-by-step solution

Definition of Net Income

The net benefit generated after adjusting every expense incurred is known as net income. It is also adjusted with the tax and interest paid by the business entity.

Contribution margin income statement

Particular	Amount $
Sales 12,500 units @ $180 per unit	$2,250,000
Less: Variable cost @ $135 per unit	(1,687,500)
Contribution margin	562,500
Less: Fixed cost	(562,500)
Net income	$0

Working note:

Calculation of break-even point in units:

$\begin{array}{rcl}\mathrm{Break}-\mathrm{even}\mathrm{point}& =& \frac{\mathrm{Fixed}\mathrm{cost}}{\mathrm{Sales}\mathrm{price}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}}\\ & =& \frac{\$562,500}{\$180-\$135}\\ & =& \frac{\$562,500}{\$45}\\ & =& 12,500\end{array}$

Break-even point after an increase in fixed cost

$\begin{array}{rcl}\mathrm{Break}-\mathrm{even}\mathrm{point}& =& \frac{\mathrm{Fixed}\mathrm{cost}+\mathrm{Increase}}{\mathrm{Sales}\mathrm{price}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}}\times \mathrm{Sales}\mathrm{price}\mathrm{per}\mathrm{unit}\\ & =& \frac{\$562,500+\$135,000}{\$180-\$135}\times \$180\\ & =& \frac{\$697,500}{\$45}\times \$180\\ & =& \$2,790,000\end{array}$