Chapter 6, Problem 10E

To determine

Break-even analysis: It is an analysis and study of variables with goal to find a point where a company is neither making profits nor suffering any losses.

The Overall contribution margin ratio and overall break-even point in dollar sales.

Answer to Problem 10E

Solution:

1. The Contribution Margin Ratio is 30%
2. Break-Even point in dollar sales is $ 80,000
3. Verification of Break-Even point with the construction of the contribution format income statement by showing the appropriate levels of sales for the two products is shown below.
  $$

Explanation of Solution

A contribution margin ratio is computed by dividing the total contribution margin by total Sales revenue from both products. An overall break-even point is ascertained by dividing the total fixed expense of both products by the overall contribution margin ratio.

1)

  $\begin{array}{l}OverallContributionMarginRatio=\frac{OverallContributionMargin}{OverallSalesRevenue}\hfill \\ =\frac{\$30,000}{\$100,000}\hfill \\ = 30\%\hfill \end{array}$

$\begin{array}{l}2)ComputationofOverallBreak-EvenPointindollarsales\hfill \\ OverallBreak-EvenPointinDollarsales=\frac{TotalFixedcost}{OverallContributionMarginRatio}\hfill \\ =\frac{\$24,000}{0.30}\hfill \\ =\$80,000\hfill \end{array}$

3)

Lucido Products contribution format income statement
	Claimjumper	Makeover	Total
Sales	$30,000	$70,000	$100,000
Variable expenses	$20,000	$50,000	$70,000
Contribution margin	$10,000	$20,000	$30,000
Fixed expenses	$7,200	$16,800	$24,000
Net operating income	$2,800	$3,200	$6,000

Given:

	Claimjumper	Makeover	Total
Sales	$30,000	$70,000	$100,000
Variable expenses	$20,000	$50,000	$70,000
Contribution margin	$10,000	$20,000	$30,000
Fixed expenses			$24,000
Net operating income			$6,000

Conclusion

Hence, the Overall CM ratio 30% and Overall break-even point in dollar sales is $80,000 in case of Lucido Products. A contribution margin ratio is basically the percentage of contribution margin with sales revenue.