Question

Refer to the information in Exercise 18-16. If the company raises its selling price to $240 per unit, compute its (1) contribution margin per unit, (2) contribution margin ratio, (3) break-even point in units, and (4) break-even point in sales dollars.

Short answer

1. Contribution margin per unit:$60.
2. Contribution margin ratio:0.25.
3. Break-even point in units:5,400 units.
4. Break-even point in dollars:$1,296,000.

Step-by-step solution

Definition of Break-Even Units

Break-even units are the number of sales units at which the net operating profits are nil. It is calculated using the fixed cost and the contribution margin per unit.

Contribution margin per unit

Particular	Amount $
Sales price per unit	$240
Less: variable cost	(180)
Contribution margin per unit	$60

Contribution margin ratio

$\begin{array}{rcl}\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}& =& \frac{\mathrm{Contribution}\mathrm{margin}\mathrm{per}\mathrm{unit}}{\mathrm{Sales}\mathrm{price}\mathrm{per}\mathrm{unit}}\\ & =& \frac{\$60}{\$240}\\ & =& 0.25\end{array}$

Break-even point in units

$\begin{array}{rcl}\mathrm{Break}-\mathrm{even}\mathrm{point}\mathrm{in}\mathrm{units}& =& \frac{\mathrm{Fixed}\mathrm{cost}}{\mathrm{Contribution}\mathrm{margin}\mathrm{per}\mathrm{unit}}\\ & =& \frac{\$324,000}{\$60}\\ & =& 5,400\mathrm{units}\end{array}$

Break-even point in dollars

$\begin{array}{rcl}\mathrm{Break}-\mathrm{even}\mathrm{point}\mathrm{in}\mathrm{dollars}& =& \frac{\mathrm{Fixed}\mathrm{cost}}{\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}}\\ & =& \frac{\$324,000}{0.25}\\ & =& \$1,296,000\end{array}$