The Ornate Company produces a single product and has total costs ranging from $321,875 (at 20,000 units) to $966,875 (at 80,000 units). Sales volume in 2020 was 32,000, and operating income was $45,125. Ornate's product is highly specialized; therefore, no units are kept in inventory.Required:(a.) Determine the cost equation for Ornate's costs.(b.) Prepare a contribution margin income statement for 2020 including separate columns for total dollars, per unit dollars, and percentages.(c.) Determine the break-even point (in units and in dollars).
What will be an ideal response?
(a.)
Variable cost per unit = ($966,875 - $321,875)/(80,000 - 20,000) = $10.75.
Fixed costs = $966,875 - (80,000) ($10.75) = $106,875.
Total Costs = $106,875 + ($10.75 × units).
(b.)
Total contribution margin = $45,125 + 106,875 = $152,000.
Total variable costs = $10.75 (32,000) = $344,000.
Total sales = $344,000 + 152,000 = $496,000.
Selling price per unit = $496,000/32,000 = $15.50.
Contribution margin per unit = $152,000/32,000 = $4.75.
Contribution margin ratio = $152,000/$496,000 = 30.645%.
| Total | Per Unit | % | ||||||
| Sales | $ | 496,000 | $ | 15.50 | 100.000 | |||
| Variable costs | 344,000 | 10.75 | 69.355 | |||||
| Contribution margin | 152,000 | $ | 4.75 | 30.645 | ||||
| Fixed costs | 106,875 | |||||||
| Operating profits | $ | 45,125 | ||||||
BE = $106,875/$4.75 = 22,500 units.
BE = $106,875/0.30645 = $348,752 (or 22,500 units × $15.50 = $348,750).
22,500 units; $348,750
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