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Grayson Enterprises manufactures springs and shock absorbers.Springs account for 40% of the company's total sales revenue,whereas shocks account for about 60%.The contribution margin ratios for springs and shocks are 45% and 35%,respectively.Grayson's fixed costs average $450,000 per month.
-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

[The following information applies to the questions displayed below.]
Grayson Enterprises manufactures springs and shock absorbers.Springs account for 40% of the company's total sales revenue,whereas shocks account for about 60%.The contribution margin ratios for springs and shocks are 45% and 35%,respectively.Grayson's fixed costs average $450,000 per month.
-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?

Quizplus · Accepted Answer

To calculate the break-even point, we need to divide the total fixed costs by the contribution margin ratio. 
For Grayson Enterprises: 
Contribution margin ratio for springs = 45% = 0.45 
Contribution margin ratio for shocks = 35% = 0.35 
Total fixed costs = $450,000

Let x be the sales revenue for springs and y be the sales revenue for shocks. 
Total sales revenue = x + y 
x = 0.4(x + y) 
y = 0.6(x + y) 
x = 2y/3

The contribution margin for springs = 0.45x 
The contribution margin for shocks = 0.35y = 0.35(3x/5) = 0.21x

Total contribution margin = 0.45x + 0.21x = 0.66x

At the break-even point, total sales revenue = total costs, so: 
0.4(x + y) + 0.6(x + y) - 0.66x = 450,000 
0.4x + 0.6x + 0.4y + 0.6y - 0.66x = 450,000 
1x + 1y = 1,500,000 
x + y = 1,500,000

Substituting x = 2y/3: 
2y/3 + y = 1,500,000 
5y/3 = 1,500,000 
y = 900,000

Therefore, x = 2y/3 = 600,000 
Total sales revenue = x + y = 1,500,000

The break-even point expressed in sales dollars is $1,500,000. 
So, the best choice is B.

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