Chapter 7, Problem 1RQ

1 a.

To determine

Explain how breakeven point in units is calculated by using the contribution margin approach.

Explanation of Solution

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations.

Contribution Margin: The process or theory which is used to judge the benefit given by each unit of the goods produced is called as contribution margin. The contribution margin is the difference between the selling price and the cost of the product.

By using the contribution margin approach, the breakeven point in units is calculated as below:

$\text{Breakeven point}\left(\text{Units}\right)\text{=Fixed expense}÷\text{Unit contribution margin}$

1 b.

To determine

Explain how breakeven point in units is calculated by using the equation approach.

Explanation of Solution

Equation approach: Equation approach is an alternative way to find out the breakeven point. It is based on the profit equation.

By using the equation approach, the breakeven point in units (sales volume in units) is calculated as below:

$\left(\begin{array}{l}\text{Unit sales price}\\ \times \text{ Sales volume in units}\end{array}\right)-\left(\begin{array}{l}\text{Unit variable expense}\\ \times \text{ Sales volume in units}\end{array}\right)-\text{Fixed expenses=0}$

3.

To determine

Explain how breakeven point in units is determined by using the graphical approach.

Explanation of Solution

Sales revenue and total expenses are graphed according to the graphical approach. The point of intersection of total revenue and total expenses is considered as the break -even point.