BREAK EVEN POINT

Problem 1: The Monster Company manufactures three products – product X, product Y and product Z.
The variable expenses and sales prices of all the products are given below:

The total fixed expenses of the company are $50,000 per month. For the coming moth. Monster
expects the sale of three products in the following ratio:
Product X: 20%;
Product Y: 30%;
Product Z: 50%

Required: Compute the break-even point of Monster Company in units and dollars for the coming
month.

Solution: Monster Company sells three products and is, therefore, a multi-product company. Its
break-even point can be computed by applying the above formula:
Particulars Product X ($) Product Y ($) Product Z ($) Total
Sale per unit 200 100 50 350
Var. cost per unit (100) (75) (25) (200)
Contribution per 100 25 25 150
unit
Product mix 20% 30% 50% 100%
Weighted avg. 20 7.5 12.5 40
contribution margin

Total Fixed Cost $50,000

Break-even point in unit = = = 1250 units
Weighted avg.contribution margin 40

The company will have to sell 1,250 units to break-even. Now I would compute the number of units
of each product to be sold:

Product X (1,250 × 20%): 250 units

Product Y (1,250 × 30%): 375 units
Product Z (1,250 × 50%): 625 units
Total: 250 units + 375 units + 625 units = 1,250 units

As the number of units of each individual product to be sold have been computed, I can compute
the breakeven point in dollars as follows:

PREPARED BY: | MD. Morshedul Alam

The break-even point of Monster Company is $118,750. It can be verified by preparing
a contribution margin income as follows:

Problem 2
Belle Company manufactures and sells three products: Products A, B, and C. The following data has
been provided the company.
A B C
Selling price $100 $120 $50
Variable cost per unit 60 90 40
Contribution margin per unit 40 30 10
Contribution margin ratio 40% 25% 20%

The company sells 5 units of C for every unit of A and 2 units of B for every unit of A. The company
incurred in $120,000 total fixed costs. Calculated the break-even point in both units and sales amount.

Solution: Sales Mix: 1 : 2 : 5 = A : B : C

a. Computation of weighted average CM per unit:

∑(CM per unit x Unit sales mix ratio)
Product A ($40 x 1/8) $ 5.00
Product B ($30 x 2/8) 7.50
Product C ($10 x 5/8) 6.25
WA CM per unit $18.75

The weighted average CM may also be computed by dividing the total CM by the total number of
units.
WA CM per unit (40x1)+(30x2)+(10x5)
= = 18.75
8

1. Multi-product break-even point in units

BEP in units = Total fixed costs
Weighted average CM per unitt

$120,000
$18.75

PREPARED BY: | MD. Morshedul Alam

BEP in units =6,400 units

b. Breakdown of the break-even sales in units:

(B-E point x Unit sales mix ratio) Units Produced
Product A (6,400 units x 1/8) 800
Product B (6,400 units x 2/8) 1,600
Product C (6,400 units x 5/8) 4,000
Total 6,400 units
The company must produce and sell 800 units of Product A, 1,600 units of Product B, and 4,000 units
of Product C in order to break-even.

2. Multi-product break-even point in dollars

a. Computation of weighted average CM ratio:

The weighted average CM may also be computed by dividing the total CM by the total sales.
WA CM ratio = (40x1)+(30x2)+(10x5)
(100x1)+(120x2)+(50x5)

WA CM ratio = 25.4237%

BEP in dollars = Total fixed costs

Weighted average CM ratio

$120,000
25.4237%

BEP in dollars = $472,000

b. Breakdown of the break-even sales revenue:

Total sales = ($100 x 1) + ($120 x 2) + ($50 x 5) = $590

(B-E point x Sales revenue ratio)

Product A ($472,000 x 100/590) $ 80,000
Product B ($472,000 x 240/590) 192,000
Product C ($472,000 x 250/590) 200,000
Total $472,000

The company must generate sales of $80,000 for Product A, $192,000 for product B, and $200,000
for Product C, in order to break-even. Alternatively, these can be computed by multiplying the
individual break-even point in units for each product by their corresponding selling price, i.e. 800
units x $100 for Product A = $80,000, 1,600 units x $120 for Product B = $192,000, and 4,000 units x
$50 for Product C = $200,000.

PREPARED BY: | MD. Morshedul Alam

PROBLEM 3
Hawaiian Candy Company is a wholesale distributor of candy. Small but steady growth in sales has
been achieved by the company over the past few years while candy prices have been increasing. The
company is manufacturing its plans for the coming fiscal year. Presented below are the data used to
project income of $184,000.

Expected annual sales volume (390,000 boxes) $1,560,000

Required:
(i) What is Hawaiian Candy Company’s breakeven point in boxes of candy and in dollar amount for the
current year?
(ii) Calculate margin of safety and degree of operating leverage of the current year.

PROBLEM 4:
A company manufactures and sells 5000 units of product X per year. Suppose one unit of product X
requires the following costs:

Direct materials: $5 per unit

Direct labor: $4 per unit
Variable manufacturing overhead: $1 per unit
Fixed manufacturing overhead: $20,000 per year

Required: Calculated the unit cost under both absorption costing and variable costing method.

Solution: Unit product cost of the company is computed as follows:

Absorption Costing: $5 + $4 + $1 + $4* = $14

Variable Costing: $5 + $4 + $1 = $10

*Fixed O/H rate per unit = $20,000 / 5,000 = $4

Notice that the fixed manufacturing overhead cost has not been included in the unit cost under
variable costing system but it has been included in the unit cost under absorption costing system.
This is the primary difference between variable and absorption costing.

PREPARED BY: | MD. Morshedul Alam

PROBLEM 5: Sunshine Company produces and sells only washing machines. The company uses
variable costing for internal reporting and absorption costing for external reporting. The data for
the year 2016 is given below:

Direct materials: $150/unit

Direct labor: $45/unit
Variable manufacturing overhead: $25/unit
Fixed manufacturing overhead: $160,000 per year
Fixed marketing and administrative expenses: $110,000 per year
Variable marketing and administrative expenses: $15/unit sold

Company produced and sold 8,000 machines during the year 2016.

Required: Compute the unite product cost under variable costing and absorption costing.

Solution:

** Fixed O/H Cost per Unit = $160,000 / 8,000 Units = $20

Note: Marketing and administrative expenses are period costs and are not relevant in the
computation of unit product cost.

PREPARED BY: | MD. Morshedul Alam

PROBLEM 5:

Solution:

PREPARED BY: | MD. Morshedul Alam

Under the absorption costing, notice that all production costs, variable and fixed, are included when
determining the unit product cost. Thus if the company sells a unit of product and absorption costing
is being used, then $12 (consisting of $7 variable cost and $5 fixed cost) will be deducted on the
income statement as cost of goods sold. Similarly, any unsold units will be carried as inventory on the
balance sheet at $12 each.

Under variable costing, notice that all variable costs of production are included in product costs. Thus
if the company sells a unit of product, only $7 will be deducted as cost of goods sold, and unsold units
will be carried in the balance sheet inventory account at only $7.

PROBLEM 6:
Slim and Trim produces frozen yoghurt, a low-fat dairy dessert. The product is sold in five-litre
containers and had the following price and variable costs per unit in the current year:

Budgeted fixed overhead for the current year was $600,000, which was equal to actual fixed
overhead. Actual production was 150,000 five-litre containers, which was equal to the budgeted level
of production, but only 125,000 containers were sold. Slim and Trim incurred the following selling and
administrative expenses:

Required:
(i) Calculate the cost per unit under variable and absorption costing.
(ii) Prepare income statements for the current year using:
 Absorption costing;
 Variable costing.

Solution:

PREPARED BY: | MD. Morshedul Alam