Ryan Company manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Ryan incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling. If Ryan raises its selling price by 10% in response to a 10% increase in variable costs, and income taxes are 40%, its new breakeven point in sales dollars (relative to that of the original data above) will be

Question

Quizplus · Accepted Answer

The breakeven point in sales dollars is calculated as (fixed costs + target profit) / contribution margin ratio. Since only variable costs are increasing by 10%, the contribution margin per unit will remain the same. Increasing the selling price by 10% will also increase the contribution margin per unit by 10%, but this is offset by the increase in variable selling costs. Therefore, the contribution margin ratio remains unchanged, and the breakeven point in sales dollars will be the same as the original data.

Ryan Company Manufactures a Single Product