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Break-even analysis
The production of a new product required Zion Manufacturing Co. to lease additional plant facilities. Based
on studies, the following data have been made available: Estimated annual sales—24,000 unit
Amount
Per Unit
Estimated costs:
Materials ..........................................
$ 96,000
Direct labor........................................
14,400
Factory overhead .............................
$4.00
.60
24,000
1.00
Administrative expense....................... 28,800
1.20
Total........................................................... $163,200
$6.80
Selling expenses are expected to be 5% of sales, and net income is to amount to $2.00 per unit.
Required:
1. Calculate the selling price per unit. (Hint: Let “X” equal the sell- ing price and express selling expense as a
percentage of “X.”)
2. Prepare an absorption costing income statement for the year ended December 31, 2016.
3. Calculate the break-even point expressed in dollars and in units, assuming that administrative expense and
factory over- head are all fixed but other costs are fully variable.
:: Solution ::
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Step 1
Break-even point –
Break-even point refers to the point at which the revenue becomes equal to the expense we have undergone
and break-even point analysis helps to determine the levels of sales or production that are required to
overcome the cost.
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Step 2
1) Computation of Selling Price per unit:
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Particulars
Materials
Direct labour
Factory overhead
Administrative expenses
Net income
Subtotal
Selling expenses ($9.26×5%)
Selling price per unit
Amount Percentage
$4
43.16%
$0.60 6.48%
$1
10.80%
$1.2
12.96%
$2
21.60%
$8.8
95%
$0.46 5%
$9.26 100%
Selling expenses are 5% of sales
Total expenses excluding selling expenses = $8.8 (95%)
Selling price ($8.8×100/95) = $9.26
2)
Zion manufacturing company
Income statement
For the year ended December 31 , 20162
Particulars
Amount Amount
Sales (24000×$9.26)
$222,240
Less: Cost of goods sold
Materials ($4×24,000)
($96,000)
Direct labour ($0.6×24000)
($14,400)
Factory overhead ($1×24,000)
($24000) ($134,400)
Gross margin on sales
$87,840
Operating expenses:
Selling expenses ($0.46×24000)
($11,040)
Administrative expenses ($1.2×24000) ($28,800) ($39,840)
Net operating income
$48,000
3) Computation of break even point in units and dollars;
Contribution margin = Selling price per unit − V ariable cost per unit
= Selling price per unit − (M aterials + Direct labour + Selling expenses)
= $9. 26 − ($4 + $0. 6 + $0. 46)
= $4. 2 per unit
Contribution margin ratio
=
=
Contribution M argin
Sales
$4.2
9.26
= 45. 36%
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Break even point in dollars
=
$24,000
$28,800
=
F ixed Cost
Contribution M argin
x45. 36%
= $116, 402
($24000+$28800)
Break even point in units
=
$4.2
= 12, 572 units
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