Question

SBD Phone Company sells its waterproof phone case for \(90 per unit. Fixed costs total \)162,000, and variable costs are $36 per unit. Determine the (1) contribution margin ratio and (2) break-even point in dollars.

Short answer

1. Contribution margin ratio:0.6
2. Break-even in dollars: $270,000

Step-by-step solution

Definition of Fixed Cost

The cost that does not get affected by the level of activity achieved by the business entity is known as a fixed cost. Such cost remains fixed until the capacity is increased by capital expenditure.

Contribution margin ratio

$\begin{array}{rcl}\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}& =& \frac{\mathrm{Sales}\mathrm{price}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}}{\mathrm{Sales}\mathrm{price}}\\ & =& \frac{\$90-\$36}{\$90}\\ & =& 0.6\end{array}$

Break-even in dollars

$\begin{array}{rcl}\mathrm{Break}-\mathrm{even}\mathrm{in}\mathrm{dollars}& =& \frac{\mathrm{Fixed}\mathrm{cost}}{\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}}\\ & =& \frac{\$162,000}{0.6}\\ & =& \$270,000\end{array}$