Break-Even Analysis The production of a new product required Zion Manufacturing

Question

Break-Even Analysis

The production of a new product required Zion Manufacturing Co. to lease additional plant facilities. Based on studies, the following data have been made available: Estimated annual sales—24,000 units

Selling expenses are expected to be 5% of sales, and net income is to amount to $2.00 per unit.

Required:

1. Calculate the selling price per unit. (Hint: Let "X" equal the selling price and express selling expense as a percentage of "X.") Round your answer to two decimal places and use the rounded number in subsequent requirements, if necessary.

2. Prepare an absorption costing income statement for the year ended December 31, 2016. If needed, round interim computations to 2 decimal places.

3. Calculate the break-even point expressed in dollars and in units, assuming that administrative expense and factory overhead are all fixed but other costs are fully variable.

If needed, round interim computations to 4 decimal points and use your rounded figure in subsequent computations. Round your final answers to the nearest whole number.

Explanation / Answer

1) Let X be the seliing price.

then Selling expenses would 0.05x

Now, cost + profit= Sales

4(Direct Material)+0,6(Labour)+2.2(Overhead)+0.05x(Seliing expense)+2(profit)= x

8.8= 0.95x

x= 9.26

So, selling price is $9.26

Seliing expenses are $0.46

2)Absorption Costing Income Statement

Sales(24000*9.26) $222,240

Less:Cost of goods sold

Direct Material(24000*4) ($96,000)

Direct Labour(24000*0.6) ($14,400)

Factory Overhead(24000*1) ($24,000)

Gross Profit $87,840

Less: Selling and administrative Exp.

Admins. Exp.(24000*1.2) ($28,800)

Selling Expenses(24000*0.46) ($11,040)

Net Profit(24000*2) $48,000

3)Breakeven point in amount

First we need to find out contribution margin.

So contribution would be sales- variable cost i.e.9.26-4-0.6-0.46= 4.2

So, Contribution Margin ratio= 4.2/9.26= 45.36%

Breakeven in amount= total fixed expenses/contribution margin ratio= 52800/45.36%= $116,402

Breakeven in units= Fixed expenses/ contribution margin

=52800/4.2 = 12572 units

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