Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. For the coming year,the management of Barnes Corporation anticipates a 10 percent increase in sales,a 12 percent increase in variable costs,and a $45,000 increase in fixed expenses.
The break-even point for next year would be
A)$729,027.
B)$862,103.
C)$214,018.
D)$474,000.
E)$700,000.

Question

Quizplus · Accepted Answer

The correct answer is A.The break-even point is the level of sales at which the company's total revenue equals its total costs. To calculate the break-even point, we can use the following formula:Break-even point = Fixed costs / (Contribution margin ratio)The contribution margin ratio is the percentage of each sales dollar that contributes to covering fixed costs and generating profit. It is calculated as follows:Contribution margin ratio = (Sales - Variable costs) / SalesFor the current year, the contribution margin ratio is:Contribution margin ratio = ($1,000,000 - $600,000) / $1,000,000 = 40%For the coming year, the management of Barnes Corporation anticipates a 10 percent increase in sales, a 12 percent increase in variable costs, and a $45,000 increase in fixed expenses. Therefore, the pro forma income statement for the coming year is as follows:Sales $1,100,000Variable costs $672,000Contribution margin $428,000Fixed expenses $245,000Net income $183,000The contribution margin ratio for the coming year is:Contribution margin ratio = ($1,100,000 - $672,000) / $1,100,000 = 39%Therefore, the break-even point for the coming year is:Break-even point = $245,000 / 0.39 = $729,027

Barnes Corporation Manufactures Skateboards and Is in the Process of Preparing