Gardner Corporation manufactures skateboards and is in the process of preparing

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 G&A Variable 200,000 Fixed 250,000 450,000 Operating Income $ 475,000 The break-even point (rounded to the nearest dollar) for Gardner Corporation for the current year is:

Explanation / Answer

Variable costs = $250,000 + $150,000 + $75,000 + $200,000 = $675,000

Contribution margin ratio = (Sales - Variable costs) / Sales = ($1,500,000 - $675,000) / $1,500,000 = 0.55 or 55%

Break-even point = Fixed costs / Contribution margin ratio = ($100,000 + $250,000) / 0.55 = $636,364

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