Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 22

Basic CVP Analysis

The manager of Kima’s Food Mart estimates operating costs for the year will include $900,000 in fixed costs.

Required

a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent.

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b. Find the break-even point in sales dollars with a contribution margin ratio of 25 percent.

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c. Find the sales dollars required to generate a profit of $200,000 for the year assuming a contribution margin ratio of 40 percent.

Step 1 of 3

a.

Calculation of Break-even point (in sales dollars)

Break-even point is the level of operations at which the sales revenue and total costs (variable costs and fixed costs) become equal. There is no profit or no loss at break-even point sales.

Break-even point (in sales dollars) can be calculated using the following equation

Break-even point (in sales dollars)

Fixed costs are the costs that are fixed in amount irrespective of the volume of the operations. The contribution margin ratio is the contribution margin as a percentage of sales revenue.

It is given that the fixed costs are $900,000 and the contribution margin ratio is 40%.

Now, calculate the break-even point in sales dollars as follows:

Therefore, the break-even point in sales dollars is $2,250,000.