Tom Johnson Manufacturing intends to increase capacity through the addition of new equipment. Two vendors have presented proposals. The fixed costs for proposal A are $50,000, and for proposal B, $70,000. The variable cost for A is $12.00, and for B, $10.00. The revenue generated by each unit is $20.00.

A) What is the break-even point in dollars for proposal A? ( enter your response as a whole number)

B) What is the break-even point in dollars for proposal B? ( enter your response as a whole number)

Question

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Respuesta :

andromache andromache · Answer 1 · 2019-12-26T11:08:59+01:00

Answer:

a. $125,000

b. $140,000

Explanation:

The computation is shown below:

Break-even point in sales = (Fixed expenses ) ÷ (Contribution margin ratio)

where,

Contribution margin ratio = Contribution margin per unit ÷ selling price per unit

where,

Contribution margin per unit = Revenue generated by each unit - variable cost per unit

a. For proposal A,

Contribution margin per unit would be

= $20 - $12

= $8

And, Contribution margin ratio equal to

= $8 ÷ $20

= 40%

Now the break-even point in dollars would be

= $50,000 ÷ 40%

= $125,000

b. For proposal B,

Contribution margin per unit would be

= $20 - $10

= $10

And, Contribution margin ratio equal to

= $10 ÷ $20

= 50%

Now the break-even point in dollars would be

= $70,000 ÷ 50%

= $140,000