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# Break Even Point and Contribution Margin

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James Manufacturing company provides the following information about its cost structure:
Selling Price \$20.00 per book
Variable cost per unit: \$6.00
Fixed costs: 112000 per year
How many units must be sold to break-even?
Assume the variable cost and the price were both cut by \$4.00 per unit. Which of the following would change?
Contribution margin per unit
Breakeven point in units
Total fixed costs
Contribution margin ratio

#### Solution Preview

James Company
(a) Selling price per unit \$20

Less:Variable cost \$6
© Contribution margin per unit (a-b) \$14
Contribution margin ratio (Contribtion/sales) 70%
Break Even point in units= Fixed cost
Contribution margin
\$112,000
\$14
Break Even point in units= 8,000 Units

Sales (20-4) \$16
Variable cost (6-4) \$2
1 Contribution margin \$14 No Change

2 Break Even point in units= Fixed ...

#### Solution Summary

The solution contains step by step calculations of break even point in units and dollar amount under the different situations i.e. cut in selling price and variable cost per unit. Solution is supported by explanatory notes regarding fixed cost, variable cost and break even analysis.

\$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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