(Algo) Break-Even Analysis (LO2-5)

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(Algo) Break-Even Analysis (LO2-5) Mauro Products Distributes A Single Product, A Woven Basket Whose Selling Price Is $25 Per Unit And Whose Variable Expense Is $18 Per Unit. The Company’s Monthly Fixed Expense Is $9,100. Required: 1. Calculate The Company’s Break-Even Point In Unit Sales. 2. Calculate The Company’s Break-Even Point In Dollar

The Correct Answer and Explanation is :

Let’s break down the solution to your question step by step.

Given Information:

  • Selling Price per Unit = $25
  • Variable Expense per Unit = $18
  • Monthly Fixed Expenses = $9,100

Formula for Break-Even Point in Units:

The break-even point in units can be calculated using the formula: Break-Even Point (Units)=Fixed ExpensesSelling Price per Unit−Variable Expense per Unit\text{Break-Even Point (Units)} = \frac{\text{Fixed Expenses}}{\text{Selling Price per Unit} – \text{Variable Expense per Unit}}

Where:

  • Fixed Expenses = $9,100
  • Selling Price per Unit = $25
  • Variable Expense per Unit = $18

Step 1: Calculate the Break-Even Point in Units:

Break-Even Point (Units)=9,10025−18\text{Break-Even Point (Units)} = \frac{9,100}{25 – 18} Break-Even Point (Units)=9,1007≈1,300 units\text{Break-Even Point (Units)} = \frac{9,100}{7} \approx 1,300 \text{ units}

So, the company needs to sell 1,300 units to break even.

Step 2: Calculate the Break-Even Point in Dollars:

The break-even point in dollars is calculated by multiplying the break-even point in units by the selling price per unit: Break-Even Point (Dollars)=Break-Even Point (Units)×Selling Price per Unit\text{Break-Even Point (Dollars)} = \text{Break-Even Point (Units)} \times \text{Selling Price per Unit} Break-Even Point (Dollars)=1,300×25=32,500\text{Break-Even Point (Dollars)} = 1,300 \times 25 = 32,500

Thus, the break-even point in dollars is $32,500.

Explanation:

  • Fixed expenses are costs that do not change with the level of production or sales. In this case, the fixed expense is $9,100 per month.
  • Variable expenses are costs that change in direct proportion to the number of units produced or sold. Here, it costs $18 to produce each woven basket.
  • The contribution margin per unit is the difference between the selling price per unit and the variable expense per unit, which is $25 – $18 = $7.
  • To cover the fixed expenses, the company needs to sell enough units so that the total contribution margin equals the fixed expenses. Thus, dividing the fixed expenses by the contribution margin gives the break-even point in units.
  • After calculating the number of units, we multiply it by the selling price to find the break-even point in terms of revenue.

This analysis helps the company understand how many units need to be sold to cover all costs and start making a profit.

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