In 2011, Hoffmann Company had a break-even point of $350,000 based on a selling

Question

In 2011, Hoffmann Company had a break-even point of $350,000 based on a selling price of $7 per unit and fixed costs of $105,000. In 2012, the selling price and the variable cost per unit did not change, but the break-even point increased to $420,000.


Compute the variable cost per unit and the contribution margin ratio for 2011. (Round variable cost to 2 decimal places, e.g. 2.25, and the other answer to 0 decimal places, e.g. 125.)

Variable cost per unit $:
Contribution margin ratio % :
Compute the increase in fixed costs for 2012.$:

Explanation / Answer

Dividing the break-even point (350,000) by the selling price (7) will give the number of units needed to be sold at the break even point (50,000). Then divide the fixed costs (105,000) by the number sold at break even point (50,000) to find the contribution margin (2.10). Then take the selling price (7) and subtract the contribution margin (2.10) to find the variable cost per unit, which is $4.90. To find the contribution margin ratio, use the formula: contribution margin ratio = unit contribution margin/price, which is 2.1/7 = 0.3 or 30% To find the increase in fixed costs for 2012. Find the increase in sales at break even point 420,000 - 350,000 = 70,000. Multiple by the contribution margin ratio of 30% and get 21,000, which represents the increase in fixed costs.

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