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Managerial Accounting : Contribution Margins, Break-even Point and Net Operating Income

Baker Company has a product that sells for $20 per unit. The variable expenses are $12 per unit, and fixed expenses total $30,000 per year.

Required:

a. What is the total contribution margin at the break-even point?

b. What is the contribution margin ratio for the product?

c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how much would net operating income be expected to increase?

d. The marketing manager wants to increase advertising by $6,000 per year. How many additional units would have to be sold to increase overall net operating income by $2,000?

Solution Preview

Required:
a. What is the total contribution margin at the break-even point?
Contribution Margin per unit= $20-12=$8 per unit (Selling price per unit-Variable cost per unit)

Fixed Expenses =$30000

Break even units= Fixed costs/Contribution Margin per unit= 30000/8= 3750 units
Thus break even units = 3750 units and ...

Solution Summary

Contribution Margins, Break-even Point and Net Operating Income are investigated.

$2.19