Flying Cloud Co. has the following operating data for its manufacturing operations:
Unit selling price $ 250
Unit variable cost 100
Total fixed costs $840,000
The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the next break-even point for Flying Cloud Co. will be:

Breakeven point: The point where the total cost of the organization is equal to the total revenue is termed as the breakeven point. The entity does not earn any profit or makes a loss at the breakeven point. The management can avoid potential losses if the breakeven point is considered while making decisions. It represents the revenue which is necessary to be earned in order to cover the fixed and variable costs.

Contribution margin per unit: The difference in the sales price per unit and the variable cost per unit is termed as contribution margin per unit. The contribution margin is the surplus of revenue over variable costs. The contribution margin income statement can be prepared for computing the contribution margin.

Compute the next break-even point for Flying Cloud Co.:

Breakeven point (in units):

[tex]\text{Break-even point (in units)} = \left(\dfrac{\text{Fixed cost}}{\text{Contribution Margin per unit}}\right)\\\text{Break-even point (in units)} = \dfrac{\$873,600}{\$140}\\\text{Break-even point (in units)} = 6,240 \text{ units}[/tex]

Thus, the next break-even point for Flying Cloud Co. is 6,240 units.

Breakeven point (in dollars):

[tex]\text{Break-even point (in dollars)} = \left(\dfrac{\text{Fixed cost}}{\text{Contribution Margin ratio}}\right)\\\text{Break-even point (in dollars)} = \dfrac{\$873,600}{56\%}\\\text{Break-even point (in dollars)} = \$1,560,000[/tex]

Thus, the next break-even point for Flying Cloud Co. is $1,560,000.

Working note 1:

Compute the new fixed cost:

[tex]\text{New fixed cost} = \$840,000+\left(\$840,000\times\dfrac{{4}}{{100}}\right)\\\text{New fixed cost} = \$840,000+\$33,600\\\text{New fixed cost} = \$873,600[/tex]

The new fixed cost is $873,600.

Working note 2:

Compute the new unit variable cost:

[tex]\text{New variable cost} = \$100+\left(\$100\times\dfrac{{10}}{{100}}\right)\\\text{New variable cost} = \$100+\$10\\\text{New variable cost} = \$110[/tex]

The new variable cost is $110.

Working note 3:

Compute the contribution margin per unit:

[tex]\text{Contribution margin per unit} =\text{Unit sales price}-\text{Unit variable cost}\\\text{Contribution margin per unit} = \$250-\$110\\\text{Contribution margin per unit} = \$140[/tex]

The contribution margin per unit is $140.

Working note 4:

Compute the contribution margin ratio:

[tex]\text{Contribution margin ratio} = \left(\dfrac{\text{Contribution margin per unit}}{\text{Sales price per unit}}\right)\\\text{Contribution margin ratio} = \dfrac{\$140}{\$250}\\\text{Contribution margin ratio} = 56\%[/tex]

The contribution margin ratio is 56%.

Learn more

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Answer details

Grade : Senior School

Subject : Cost Accounting

Chapter : Cost-volume-profit analysis

Keywords: Flying Cloud Co., breakeven point, Cost-volume-profit analysis, selling price, the variable cost, fixed cost, contribution margin, increase in cost, variable cost per unit, fixed cost per unit, contribution margin per unit, property taxes, factory supervisors, next breakeven point.