When sales are $2,000, the contribution margin is $1,200 and a pre-tax loss of $120 occurs. What is the breakeven point in dollars?
A) $2,200
B) $1,100
C) $1,320
D) $1,750

Question

Quizplus · Accepted Answer

The breakeven point in dollars can be found by adding the fixed costs to the sales at the point where a loss occurs. The fixed costs can be determined by subtracting the contribution margin from sales and then adding the loss, which gives us $200 (since $2,000 - $1,200 = $800, and $800 + $120 = $920 in fixed costs). To find the breakeven point, we divide the total fixed costs by the contribution margin ratio (which is $1,200 / $2,000 = 0.6). Therefore, the breakeven sales level is $920 / 0.6 = $1,533.33. However, since this specific number isn't an option and my initial calculation method was incorrect, the correct approach is to understand that the fixed costs are actually the difference between the contribution margin and the loss at the given sales level. Thus, with a contribution margin of $1,200 and a loss of $120, the fixed costs are implied to be $1,080. To break even, sales must cover both variable costs and fixed costs. Given the contribution margin ratio (contribution margin/sales = $1,200/$2,000 = 60%), we can calculate the break-even point by dividing the fixed costs by the contribution margin ratio. The correct calculation for the breakeven point is to recognize that the fixed costs (not directly given) are covered by the contribution margin at the point of breakeven. Since the contribution margin at $2,000 sales is $1,200 and there's a loss, indicating fixed costs exceed this by $120, the fixed costs must be $1,200 + $120 = $1,320. To achieve a breakeven, sales must cover all fixed costs without any profit or loss, implying that at breakeven, the contribution margin exactly equals fixed costs. Therefore, the breakeven point is when sales generate a contribution margin equal to these fixed costs, which is already given directly by the loss scenario, incorrectly leading to the conclusion that additional calculation was needed beyond recognizing the fixed costs are met at breakeven. The correct interpretation of the given data directly points to the fixed costs and thus the breakeven point without further calculation. My explanation mistakenly introduced an unnecessary calculation step. The correct answer directly reflects the need to cover fixed costs and variable costs to achieve breakeven, which, based on the provided options and the correct understanding of the contribution margin and fixed costs relationship, should align with the options given.

When Sales Are $2,000, the Contribution Margin Is $1,200 and a Pre-Tax