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# 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.

\$2.19

## Compute break-even point, contribution margin per unit, operating income

Brazen, Inc. produces sound amplifiers for electric guitars. The firm's income statement showed the following:

Revenues (8,400 units) \$504,000 100%
Variable expenses (302,400) 60%
Contribution margin \$201,600 40%
Fixed expenses (140,400)
Operating income \$ 61,200

An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to \$315,000 per year. The firm's production capacity will increase, which is expected to result in a 25 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.

(a.) Calculate the firm's current contribution margin per unit and break-even point in units.
(b.) Calculate the firm's contribution margin per unit and break-even point in terms of units if the new machine is purchased.
(c.) Calculate the firm's operating income assuming that the new machine is purchased.

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