Question

Gardner Corporation manufactures skateboards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.
Sales $1,500,000

Cost of Sales:

Direct Material $250,000

Direct labor 150,000

Variable Overhead 75,000

Fixed Overhead 100,000 575,000

Gross Profit 925,000

Selling and General & Admin. Exp.

Variable 200,000

Fixed 250,000 450,000

Operating Income 475,000

For the coming year, the management of Gardner Corporation anticipates a 10 percent increase in sales, a 12 percent increase in variable costs, and a $45,000 increase in fixed costs. The break-even point for next year would be: A) $474,000. B) $214,018.
C) $729,027. D) $862, 103

Answer 1

Answer:

C) $729,027

Explanation:

The formula to compute the break even point in dollars amount is shown below:

= (Fixed cost ) ÷ (Profit volume ratio)

where,

Fixed cost = $100,000 + $250,000 + $45,000 = $395,000

And the profit volume ratio would be

= (Contribution margin) ÷ (Sales) × 100

where Contribution margin equal to

= Sales - variable cost

The sales = $1,500,000 × 110% = $1,650,000

Variable cost would be

Direct Material  = $250,000 × 112% = $280,000

Direct Labor = $150,000 × 112% = $168,000

Variable overhead = $75,000 ×112% = $84,000

Variable Selling & admin. Exp = $200,000 × 112% = $224,000

Total Variable Overhead = $756,000

Now the Contribution margin would be

= $1,650,000 -  $756,000

= $894,000

And, Contribution margin ratio

= $894,000 ÷ $1,650,000 = 54.18181818%

So, the break-even point  would be

=  $395,000 ÷ 54.18181818%

= $729,027 approx