Blanchard Company manufactures a single product that sells for $184 per unit and whose total variable costs are $138 per unit. The company’s annual fixed costs are $699,200. (1) Prepare a contribution margin income statement for Blanchard Company at the break-even point. BLANCHARD COMPANY Contribution Margin Income Statement (at Break-Even) Amount Percentage of sales
The Correct Answer and Explanation is :
Blanchard Company Contribution Margin Income Statement at Break-Even
Sales:
At the break-even point, the company generates enough sales to cover both fixed and variable costs, with no profit or loss. The formula for break-even sales volume is:
[
\text{Break-even volume} = \frac{\text{Fixed Costs}}{\text{Contribution Margin per unit}}
]
Contribution Margin per unit:
The contribution margin per unit is calculated as:
[
\text{Contribution Margin per unit} = \text{Sales price per unit} – \text{Variable costs per unit} = 184 – 138 = 46
]
Now, calculate the break-even volume:
[
\text{Break-even volume} = \frac{699,200}{46} = 15,200 \text{ units}
]
Sales Revenue:
At the break-even point, the sales revenue is:
[
\text{Sales Revenue} = 15,200 \times 184 = 2,796,800
]
Variable Costs:
The total variable costs at the break-even point are:
[
\text{Variable Costs} = 15,200 \times 138 = 2,097,600
]
Contribution Margin:
The contribution margin is:
[
\text{Contribution Margin} = \text{Sales Revenue} – \text{Variable Costs} = 2,796,800 – 2,097,600 = 699,200
]
Fixed Costs:
Fixed costs are given as 699,200.
Net Income:
At the break-even point, net income is 0 because the contribution margin exactly covers the fixed costs.
Contribution Margin Income Statement at Break-even:
| Amount | Percentage of Sales |
|---|---|
| Sales | $2,796,800 |
| Variable Costs | $2,097,600 |
| Contribution Margin | $699,200 |
| Fixed Costs | $699,200 |
| Net Income | $0 |
Explanation:
At the break-even point, Blanchard Company’s sales exactly cover the total variable and fixed costs, resulting in zero profit. The key elements of the contribution margin income statement at break-even are:
- Sales Revenue is the total amount generated from selling 15,200 units of the product at $184 per unit.
- Variable Costs are the costs associated with producing the product, totaling $2,097,600 at the break-even volume.
- Contribution Margin is the portion of sales revenue that contributes toward covering fixed costs, with 25% of the sales price being available to cover fixed costs.
- Fixed Costs remain constant at $699,200, and at break-even, they are entirely covered by the contribution margin.
- Net Income is zero at the break-even point because the contribution margin fully offsets the fixed costs.