Explore BrainMass

Breakeven analysis and cost classification for Louis Mouse Technology


Solution Preview

Refer to the word document attached

Break Even Analysis:

While performing breakeven analysis, it is important for you to know the following concepts:

A1. Unit Contribution Margin:

Is the amount that every unit produced contributes to your profit margin. This is the difference between the revenues that are generated per product and the expenses that go into making the product. These are direct expenses that go into making the product.

In this case
Revenue obtained from selling one unit: $25
Variable Cost per Unit: $12.00

The Unit Contribution Margin: $25 - $12 = $13.00

A2. Contribution Margin Ratio:

For every dollar of revenue that you receive selling the product, how much money is left over to cover your overhead and then make a profit.
Any ratio that has Margin in it usually has Sales in the denominator.
The formula for Contribution Margin is:
Unit Contribution Margin/Sales Price = 13/25 = 0.52
This means you have $0.48 to cover your fixed costs and if fixed costs/unit is less than $0.52, you can earn a profit.

B. Breakeven Point in Number of Mice Sold:

How many mice do you have to sell in order to cover your costs?
Let us assume you can sell x number of mice.

If you sell x mice, the revenues you generate from the sale is: $25x (remember every mouse is sold for $25)
The Costs associated with selling x mice are:
Variable Costs: $12x (Every mice has a total variable cost of $12)
Fixed Costs: $589,550 (It doesn't matter if you produce one mouse or 1000 mice, you HAVE to spend this money)

For breakeven, your revenues has to cover your expenses so that you don't go into a loss (you don't earn a profit either) and at least, get back the money you put in.

So, $25x = $12x + $589,550
Rearranging the above equation: $13x = $589,550. Hence, x = ...

Solution Summary

The response to the problem is a very careful analysis presented in a easily understandable format for Louis Mouse Technology.