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Homework answers / question archive / Exercise 4-24 Basic Break-Even Calculations Suppose that Adams Company sells a product for S20
Exercise 4-24 Basic Break-Even Calculations Suppose that Adams Company sells a product for S20. Unit costs are as follows:
Direct materials Direct labor Variable factory overhead Variable selling and administrative expense
$1.90 1.40 2.10 1.60
Total fixed factory overhead is S54,420 per year, and total fixed selling and administrative expense is 538,530. Required: I. Calculate the variable cost per unit and the contribution margin per unit. 2. Calculate the contribution margin ratio and the variable cost ratio. 3. Calculate the break-even units. 4. Prepare a contribution margin income statement at the break-even number of units.
1) Computation of Variable Cost per Unit and Contribution Margin per Unit:
Variable cost per unit = Direct material cost + Direct labor cost + Variable overhead cost + Variable selling expenses
= 1.90 + 1.40 + 2.10 + 1.60
Variable cost per unit = $7.00
Contribution margin = Selling price - Variable cost
= $20 - $7.00
Contribution Margin per unit = $13.00
2) Computation of Contribution Margin Ratio and Variable Cost Ratio:
Contribution Margin Ratio = Contribution Margin per Unit/Sales Price per Unit
= $13/$20
Contribution Margin Ratio = 65%
Variable Cost Ratio = Variable Cost per Unit / Sales Price per Unit
= $7/$20
Variable Cost Ratio = 35%
3) Computation of Break-even Point in Units:
Break-even Point in Units = Total Fixed Costs/Contribution Margin per Unit
Here,
Total Fixed cost = Total Fixed Overhead + Total Fixed selling and administration expenses
= $54,420+$38,530
Total Fixed Cost = $92,950
Break-even Point in Units = $92,950/$13 = 7,150 units
4) PFA
