Question

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month.

Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.

Short answer

The breakeven sales in dollars is $577,500.

Step-by-step solution

Calculation of Contribution margin ratio

$\begin{array}{c}\mathrm{Contribution}\mathrm{margin}=\mathrm{Sales}\mathrm{price}–\mathrm{Variable}\mathrm{cost}\\ =\$70-\$42\\ =\$28\\ \mathbf{Contribution}\mathbf{}\mathbf{margin}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathrm{Contribution}\mathrm{margin}\mathrm{per}\mathrm{unit}}{\mathrm{Sales}\mathrm{revenue}}\\ \mathbf{=}\frac{\$28}{\$70}\\ =40\%\end{array}$

Calculation of breakeven point in sales dollars

$\begin{array}{c}\mathbf{Sales}\mathbf{}\mathbf{required}\mathbf{}\mathbf{in}\mathbf{}\mathbf{dollars}\mathbf{=}\frac{\mathrm{Fixed}\mathrm{cost}+\mathrm{Target}\mathrm{profit}}{\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}}\\ \mathbf{=}\frac{\$231,000+\$0}{40\%}\\ =\$577,500\end{array}$

Calculation of breakeven point in sales units

$\begin{array}{c}\mathbf{Sales}\mathbf{}\mathbf{required}\mathbf{}\mathbf{in}\mathbf{}\mathbf{units}\mathbf{=}\frac{\mathrm{Fixed}\mathrm{cost}+\mathrm{Target}\mathrm{profit}}{\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}}\\ \mathbf{=}\frac{\$231,000+\$0}{\$28}\\ =8,250\end{array}$