Hopalong Hot Dog Stand has had the following average results for the past several months: Its selling price per hot dog is $3. Total monthly sales revenues have been $6,000, direct costs of labor and food ingredients have been $2,500 per month, variable indirect costs have been $500 per month, and fixed costs have been $1,500 per month. If Hopalong experiences a $150 per month increase in insurance costs, what will this increase do to its break-even point?
A) Break-even point will increase by 150 hot dogs per month.
B) Break-even point will increase by 200 hot dogs per month.
C) Break-even point will increase by 100 hot dogs per month.
D) Break-even point will increase by 225 hot dogs per month.

Question

Quizplus · Accepted Answer

Hopalong currently has a contribution margin ratio of 50%. The per-month calculations follow: Contribution margin = $6,000 in sales revenues F1F1F1S1?F1F1F10 $2,500 in direct labor and ingredients costs F1F1F1S1?F1F1F10 $500 in variable indirect costs = $3,000. Contribution margin ratio = $3,000, contribution margin ÷ $6,000, sales revenues = 50% CM ratio. The break-even point before insurance cost increases equals the total fixed costs of $1,500 per month divided by the contribution margin for each hot dog sold, or $3 × 50% = $1.50. Therefore, monthly break-even is $1,500 divided by $1.50, or 1,000 hot dogs. If insurance costs (a fixed cost) increase by $150 per month, this will require the sale of 1,100 hot dogs: $1,650 fixed costs ($1,500 fixed cost + $150 insurance) ÷ $1.50 contribution margin per hot dog, an increase of 100 hot dogs. This can also be calculated by dividing the increased fixed insurance costs of $150 by the $1.50 contribution margin per hot dog.

Hopalong Hot Dog Stand Has Had the Following Average Results