BA 225 Break Even Point and Contribution Margin

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Break Even Point and Contribution Margin

Question A

Break-even point is a term that refers to the point at which revenue and cost or expenses and is equal. Computing the breakeven point of a company with multiple products uses the following formula:

Breakeven point = total fixed expenses

Weighted average selling price-weighted variable expenses

For us to work out the weighted average selling price, we must have the sales percentage of each single product.

Weighted average selling price = (Sale price of product A × Sales percentage of product A) + (Sale

price of product B × Sale percentage of product B)

Weighted average variable expenses = Variable expenses of product A × Sales percentage of

product A) + (Variable expenses of product B × Variable expenses of product B)

When the weighted average variable expense is subtracted from the weighted average selling price, we get weighted average contribution margin. The approach to be used to calculate the breakeven point therefore could be simplified as follows:

Breakeven point = total fixed expenses

Weighted average contribution per margin

Question B

Contribution margin is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. It simply shows how profitable a unit is (Weygandt & Kieso, 2010).

First, one must come up with the price the company sells its units at e.g. a company makes a product, a unit selling at $5. The, the variable costs for that period are separate from the fixed costs for that period on the expense report. The variable costs are added together to come up with the total variable costs. In the example, the company has $400,000 in total variable costs. Divide the total variable costs by the number of units produced for that period. In the example, if the company produces 300,000 of the product in the period, then $400,000 divided by $300,000 units equals about $1.33 per unit of variable costs. Then, the per unit variable cost is subtracted from the sales per unit to calculate the unit contribution margin. In the example, $5 minus $1.33 equals $3.67.

References

Weygandt, J., & Kieso, D. (2010). Managerial accounting: Tools for business decision

making (5th ed.). Hoboken, NJ: Wiley.




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