Last year Easton Corporation reported sales of $480,000, a contribution margin ratio of 25% and a net loss of $16,000. Based on this information, the break-even point was:
A) $435,000
B) $544,000
C) $506,000
D) $600,000

Question

Quizplus · Accepted Answer

The break-even point in sales dollars can be found using the formula: Break-even Sales = Fixed Costs / Contribution Margin Ratio. Given a net loss of $16,000 and a contribution margin ratio of 25%, we first need to find the fixed costs. The net loss means that total costs exceeded sales by $16,000. The contribution margin (CM) is sales times the CM ratio, so CM = $480,000 * 25% = $120,000. Since CM covers variable costs and fixed costs and still resulted in a loss, we add the loss to find fixed costs: $120,000 (CM) - $480,000 (Sales) = -$360,000 (Variable Costs), so Fixed Costs = $120,000 - $16,000 = $104,000. Therefore, Break-even Sales = $104,000 / 25% = $416,000. However, none of the provided options match this calculation, indicating a mistake in the calculation process. Correcting the approach: Fixed Costs = Total Sales - Variable Costs - Net Loss = $480,000 - ($480,000 * 75%) - (-$16,000) = $136,000. Thus, Break-even Sales = $136,000 / 25% = $544,000.

Last Year Easton Corporation Reported Sales of $480,000, a Contribution