[infinity]

The following information data pertains to a manufacturing company:

Total sales

$ 80,000

Total variable costs

20,000

Total fixed costs

30,000

What is the breakeven level in sales dollars?

a. $40,000 b. $50,000 c. $30,000 d. $80,000

BEC 74

Never give up, never surrender.

[infinity]

First glance it did not want to use the calculator and thought, at break-even sales should equal VC+FC. I know the formula BE=FC/CM but thought it would arrive at the same answer. It does not. Why?

BEC 74

Never give up, never surrender.

[M.O.D.]

Variable costs are a function of sales. For every $1 product sold, there are 20000/80000= $0.25 in variable costs

So the contribution margin = sales x ($1 – $0.25) = sales x 0.75

set this equal to the fixed costs 30000 = sales x .75 to find the breakeven point

sales = 40000

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[stoleway]

BEP$ = FC/CMR

CMR=SP-VC/SP

30000/.75= $40,000

Hope this helps

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
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Mass-CPA

[JackofallSections]

@infinity, a year old but better late than never.

I think to answer your question more precisely. The reason why break even does not equal VC + FC is because VC are a function of sales as the guy above me said. To say it more simply, VC would only be that amount at the 80,000 level of sales. But as you may already know, that sales amount is way over the break even amount. The actual sales needed to break even is much lower, and therefore variable costs will also be lower. The reason why these questions are hard conceptually is that two variables are changing at the same time, the amount of sales and also the amount of variable costs on both sides of the equation. However, the equation that you already know makes it a piece of cake. Hopefully this clears up any questions you have on why that particular answer is incorrect.

FAR-82
AUD-90
REG-5/28
BEC-7/5

[Anonymous]

The formula for Breakeven analysis is not “BE = FC/CM”.

There are two ways in computing Breakeven point:

1.Breakeven point In Units (#)

2. Breakeven point In Dollars ($)

Formulas:

1. BE (in #) = Fixed Costs / Contribution Margin “per Units”

2a. BE (in $) = Unit Price X Breakeven point in Units (#)

2b. BE (in $) = Fixed Costs / Contribution Margin Ratio

Explanation:

The error is you used the Contribution Margin ($60,000), instead of the Contribution Margin Ratio (CM / Sales = 0.75) as the denominator to calculate the Breakeven point in Dollars.

Solution:

Since the “Breakeven point in units” isn't provided or cannot be calculated due to lack of required information to compute the 2a formula (provided above), we will calculate the Breakeven point in Dollars with the 2b formula (provided above).

2b. BE (in $) = Fixed Costs / Contribution Margin Ratio***

2b. BE (in $) = $30,000 / 0.75***

2b. BE (in $) = $40,000

Contribution Margin Ratio*** = Contribution Margin / Sales

Contribution Margin Ratio*** = $60,000 / $80,000

Contribution Margin Ratio*** = 0.75

[Author]

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