Break-Even Sales BeerBev, Inc., reported the following operating information for

Question

Break-Even Sales

BeerBev, Inc., reported the following operating information for a recent year:

In addition, assume that BeerBev sold 37,000 barrels of beer during the year. Assume that variable costs were 75% of the cost of goods sold and 50% of selling, general and administration expenses. Assume that the remaining costs are fixed. For the following year, assume that BeerBev expects pricing, variable costs per barrel, and fixed costs to remain constant, except that new distribution and general office facilities are expected to increase fixed costs by $18,900.

a. Compute the break-even sales (barrels) for the current year. Round to the nearest whole barrel.
_______ barrels?

b. Compute the anticipated break-even sales (barrels) for the following year. Round to the nearest whole barrel.
______ barrels?

Sales $5,920,000 Cost of goods sold $1,480,000 Selling, general and administration 518,000 $1,998,000 Income from operations $ 3,922,000

Explanation / Answer

first let us know the total fixed costs:

fixed cost = 25% of cost of goods sold + 50% of selling general and administrative expenses.....(since 75% and 50% are variable, the remaining will be fixed).

($1,480,000 *25%) + ($518,000*50%)

=>$370,000 + 259,000

=>$629,000

sale price per unit = $5,920,000 / 37,000 barrels

=>$160. per barrel.

variable cost per unit = {[$1,480,000*75%]+ [518,000*50%]} / 37,000 barrels

=> [$1,110,000 + $259,000] / 37,000

=>$37.

now,

a.break even sales (barrels) => fixed cost / contribution per barrel

=> $629,000 / ($160-$37)

=>$629,000 / $123

=>5,114 barrels.

b.break even sales in following year = (fixed costs + increase in fixed) / (contribution per unit)

=> ($629,000 + $18,900) / $123

=>5,267 barrels.

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