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Break-Even Sales Revenue and Variable Cost Ratio

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The company has a variable cost ratio of 65% and monthly fixed costs of $91000. What is the company's break-even point in terms of sales dollars?

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Solution Summary

This solution calculates the break-even point in terms of sales dollars using variables of fixed costs and variable cost ratio.

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Able Co: Income statement, break even and CVP analysis

Last year, Able Co. sold all the goods it produced (it had no finished goods inventories), and sales revenue were 1,260,000. It recorded the following cost for the year: see attached file

Manufacturing Selling and Admin Total
Costs Costs

Variable $420,000 $150,000 $570,000
Fixed 220,500 260,000 480,500
Total $640,500 $410,000 $1,050,500

- Cost of Goods Sold (Expense)
Gross Margin or Gross Profit
Selling & Admin (or GS&A or Operating expenses)
Net income (Operating income)

(b) Revenue - Variable costs - Fixed costs = Profit

(c) Let Y = sales dollars necessary for a before-tax target profit of $250,000

(Revenue - Variable costs)/Revenue = Contribution margin ratio (Round to six decimal places)
The contribution margin ratio =

Using equation (2.10),
Y = (Target Profit + Fixed Cost)/Contribution Margin Ratio

(d) Let Y = sales dollars necessary to break even

Using equation (2.11),
Y = Fixed Cost/Contribution Margin Ratio

a. Prepare a financial reporting income statement (that is, in the form required under GAAP for U.S. External reporting).
b. Detemine income in the manner used in cost-volume-profit analysis
c. At what sales dollar level will Able earn a before-tax target profit of $250,000
d. At what sales dollar level will Able break even.

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