Nanu Corporation manufactures two products; data are shown below: If Nanu's monthly fixed costs average $425,000, what is its break-even point expressed in sales dollars?

Question

Quizplus · Accepted Answer

To find the break-even point in sales dollars, we need to use the formula:

Break-even point = Fixed costs ÷ Contribution margin ratio

First, we need to calculate the contribution margin per unit for each product:

Product A contribution margin per unit = $100 - $50 = $50 
Product B contribution margin per unit = $200 - $75 = $125

Next, we need to calculate the weighted average contribution margin per unit:

Weighted average contribution margin per unit = (5000 units of A × $50 per unit + 2000 units of B × $125 per unit) ÷ (5000 units of A + 2000 units of B) = $63.89 per unit

Then, we can calculate the contribution margin ratio:

Contribution margin ratio = Weighted average contribution margin per unit ÷ Selling price per unit

Product A contribution margin ratio = $50 ÷ $100 = 0.5 
Product B contribution margin ratio = $125 ÷ $200 = 0.625

Weighted average contribution margin ratio = (5000 units of A × 0.5 + 2000 units of B × 0.625) ÷ (5000 units of A + 2000 units of B) = 0.54

Finally, we can calculate the break-even point in sales dollars:

Break-even point = $425,000 ÷ 0.54 = $787,037

Therefore, the answer is B) $1,250,000.

Nanu Corporation Manufactures Two Products; Data Are Shown Below: If