Sunn Company manufactures a single product that sells for $180 per unit and whose variable costs are $135 per unit. The company’s annual fixed costs are $562,500.

 Sunn Company manufactures a single product that sells for $180 per unit and whose variable costs are $135 per unit. The company’s annual fixed costs are $562,500.
 
(1) Prepare a contribution margin income statement at the break-even point.

(2) If the company’s fixed costs increase by $135,000, what amount of sales (in dollars) is needed to break even?



Explanation
(1)
Break-even point in units = $562,500 / ($180 − $135) = 12,500 units
Sales: (12,500 × $180) = $2,250,000
Variable costs: (12,500 × $135) = $1,687,500
Contribution margin: (12,500 × $45) = $562,500

(2)
Sales (in dollars) to break even with increased fixed costs

Break-even = (Original fixed costs + Additional fixed costs) / Contribution margin ratio
= ($562,500 + $135,000) / 25% = $2,790,000


Contribution margin ratio = $45 / $180 = 25%

 

Thanks