PB4.
LO 3.2West Island distributes a single product. The companyâ€™s sales and expenses for the month of June are shown.

Using the information presented, answer these questions:

What is the break-even point in units sold and dollar sales?
What is the total contribution margin at the break-even point?
If West Island wants to earn a profit of $21,000, how many units would they have to sell?
Prepare a contribution margin income statement that reflects sales necessary to achieve the target profit.

Break-even point is the level of activity where a business makes no profit or loss. The number of units to be produced which equates the total cost to total revenue.

It is calculated as ;

Break-even point (in units)=Total general fixed cost/ (selling price per - Variable cost)

Break-even point (sales) = Break-even point (units)× units price

So for West Island, we do as follows:

Break-even point (in units) = $42,000/$(150-80)= 600 units

Break-even point (sales) = 600 × $150 = $90,000

Contribution margin ratio(C.M.R) is the proportion of sales made as contribution. It is determined as contribution/sales revenue.

To calculate the total contribution at the break-even, we just multiply the contribution per unit by the break-even point (units)

Contribution at the break-even point= (150-80) × 600=$42,000

Contribution margin ratio = 42,000/(600*150)= 46.6%

Units to be sold to achieve target profit= (Fixed cost + target profit)/ (S.P- V.C)

Therefore to earn a profit of $21,000., West Island will have to sell:

$(42,000 + 21,000)/$(150-80) = 900 units

West Island

Contribution margin income statement

Sales ( $150 900) 135,000

less variable costs($80 × 900) ( 72,000)

Contribution 63,000

Less fixed cost (42,000)

Profit 21,000

This confirms our answer !