Purchase Solution

# Break Even Analysis and Contribution Margin

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Question #1
The following is budgeted information for the Christopher Corporation:
(see attachment)

- Selling & administrative costs (a mixed cost) are budgeted to be \$600,000 at the production and sales listed above. The variable component is \$3 per unit (same for each product).
- Manufacturing overhead costs (a mixed cost) are budgeted to be \$800,000 at the production and sales listed above. The fixed component is \$300,000. Each product uses the same amount of variable manufacturing overhead per unit.

Assuming the budgeted sales mix remains intact, how many units of each product does Christopher need to sell in order to earn a target operating income of \$240,000?

Question #2
Consider the following information, prepared based on a monthly capacity of 80,000 units:
Category Cost per Unit
Variable manufacturing costs \$12.00
Fixed manufacturing costs \$3.00
Variable selling costs \$4.00
Fixed selling costs \$2.00

Capacity cannot be added in the short run and the firm currently sells the product for \$23 per unit.

The company is currently producing 74,000 units per month. A potential customer has contacted the firm and offered to purchase 6,000 units this month only. Since the potential customer approached the firm, there will be no variable selling costs incurred. What is the minimum amount that the firm should be willing to accept for this order?

##### Solution Summary

Two questions regarding break-even analysis and contribution margin are considered in this posting. The first pertains to finding the number of units that should be manufactured to reach a target income. The second is an analysis of two manufacturing scenarios, one with a special contracting order and the other without.

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