
Break-even point in dollar sales:
It is the value of sales in dollar where a company is neither making profit nor incurring any loss.
Contribution Margin Income Statement:
A contribution margin income statement separates the variable cost and fixed cost. The variable costs are deducted first from the sales revenue to arrive at contribution margin, from which fixed costs are deducted to determine the net income or loss.
To determine:
1. Compute the break-even point in dollar sales under the (a) existing business strategy and (b) new strategy that alters both unit selling price and variable costs.
2. Prepare a

Answer to Problem 6BPSB
Solution:
1.
Break-Even Point in dollars | |
Existing Strategy | New Strategy |
$1,727,273 | $1,727,273 |
2.
Net Income | |
Existing Strategy | New Strategy |
$112,500 | $475,500 |
After-tax return sales | |
5.6% | 16.5% |
Explanation of Solution
Explanation:
Existing Strategy | New Strategy | |
Sales price per unit Existing Strategy New Strategy [$20.00 X (1-20%)] |
$20.00 | $16.00 |
Total Variable Cost per unit | ||
Unit Costs ($800,000 / 100,000) | $8.00 | |
Unit Costs ($800,000 / 100,000) X (1 -25%) | $6.00 | |
Packaging ($100,000/ 100,000) | $1.00 | |
Packaging ($100,000/ 100,000) X (1+20%) | $1.20 | |
Total Variable Cost per unit | $9.00 | $7.20 |
Contribution margin | $11.00 ($20.00 - $9.00) |
$8.80 ($16.00 - $7.20) |
Contribution margin ratio | 55% ($11.00/$20.00) |
55% ($8.80/$16.00) |
2.
BEST COMPANY Contribution Margin Income Statement |
||
Existing Strategy | New Strategy | |
Sales Revenue | $2,000,000 | $2,880,000 |
Less: Variable Cost | $900,000 | $1,296,000 |
Contribution Margin | $1,100,000 | $1,584,000 |
Less: Fixed Cost | $950,000 | $950,000 |
Income before taxes | $150,000 | $634,000 |
Income Taxes (25% rate) | $37,500 | $158,500 |
Net Income | $112,500 | $475,500 |
Computation of after-tax return on sales
Conclusion:
The after-tax return on sales for existing strategy is 5.6% and new strategy is 16.5%.
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Chapter 21 Solutions
Loose Leaf for Fundamental Accounting Principles
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