Break-even Analysis Case Study - Continued

Break-even Analysis:
Problem solving steps:

❑ First find the total variable costs and total fixed costs for both High end set and Economical set
• Total variable costs is sum of labor and material costs
• Total fixed costs is the sum of direct and allocated fixed costs

High End Set Economical Set

Sales price $3,500 Per unit $1,000 Per unit

Labor $875 Per unit $250 Per unit

Materials $1,400 Per unit $300 Per unit
Total variable costs $2,275 Per unit $550 Per unit

Direct fixed costs $25,000 Per month $16,500 Per month

Allocated fixed costs $85,000 Per month $85,000 Per month
Total fixed costs $110,000 Per month $101,500 Per month

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Break-even Analysis Case Study - Continued
❑ Calculating Contribution Margin (CM)to determine break-even and break-even plus net income scenarios
• Contribution margin is the amount of money a business has in order to cover its fixed costs and contribute to net profit or loss
after paying for its variable costs. (Carlson, 2020)
• It is calculated by subtracting the variable cost per unit by sale price of each unit
CM for High-end set = $3,500 - $2,275 = $1,225
CM for Economical unit = $1,000 - $550 = $450
• A business’s break-even point is the point at which earned revenues is equal to costs (Egan, 2021)
Break-even point = Fixed cost/month ÷ Contribution margin/unit
BEP High-end set = $110,000 ÷ $1,225 = 89.80 units/month or 89.80 x 12 months = 1,078 units per year
BEP Economical set = $101,500 ÷ $450 = 225.56 units/month or 225.56 x 12 months = 2,707 units per year
• Contribution margin ratio is the ratio of contribution margin to sale price. It provides us the percentage of sales revenue that is available
to cover fixed costs. (Javed, 2021)
CM Ratio = Contribution margin per unit ÷ Sales revenue per unit
CM Percentage = (Contribution margin per unit ÷ Sales revenue per unit) x 100
CM Ratio for High-end unit = $1,225 ÷ $3,500 = 0.35, CM Percentage = 0.35 x 100 = 35%
CM Ratio for Economical unit = $450 ÷ $1,000 = 0.45, CM Percentage = 0.45 x 100 = 45%
Break-even Break-even
Contribution margin $1,225 Per unit $450 Per unit
Contribution margin $1,323,000 Per year $1,220,400 Per year
Contribution margin ratio 35% 45%
Break-even units 89.80 Per month 225.56 Per month
Break-even units 1,078 Per year 2,707 Per year

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Break-even Analysis Case Study - Continued
❑ To determine the number of units to sell annually to earn $500,000 profit for High-end units and $300,000 for
Economical units, the following calculations need to done
▪ Add $500,000 margin for High-end units to annual contribution margin and divide this result with
contribution margin per unit
= ($500,000 + $1,323,000) ÷ $1,225 per unit = 1,488 units

▪ Add $300,000 margin for Economical units to annual contribution margin and divide this result with
contribution margin per unit
= ($300,000 + $1,220,400) ÷ $450 per unit = 3,379 units

Earn $500,000 for High-end units Earn $300,000 for Economical units

Contribution margin $1,823,000 Per year $1,520,400 Per year

Units (Annually) 1,488 Per year 3,379 Per year

Conclusion:
After reviewing the calculated data, it suggest that both product lines are generating healthy margins to cover the
fixed costs even though the company has to sell more Economical units when compared to High-end units. Economical
units are yielding higher contribution margin percentage compared to High-end units, which means the company need to
review the costs for High-end unit and find ways to reduce it.

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