APPLY THE CONCEPTS: Break-Even Point in Units

The break-even point can be expressed in terms of sales dollars or number of units. Thebreak-even unitstells us how many units must be sold so that operating income is $0.

Assume that you are part of the accounting team for Koller Products. The company currently expects to sell 533 units for total revenue of $16,900 each month. Koller Products estimates direct materials costs of $3,150, direct labor costs of $4,200, variable overhead costs of $2,100, and variable selling and administrative costs of $1,050. Fixed costs of $4,800 are also expected, which includes fixed overhead and selling and administrative costs. Using this information, complete the contribution margin income statement shown below.

Koller Products

Contribution Margin Income Statement

Sales $16,900

Less: Variable costs -10500

Contribution margin $6,400

Less: Fixed costs $6,400

Operating income $1,600

Koller Products is examining cost behavior patterns. Your recommendation is to first determine the break-even point in units. First, calculate thecontribution margin (CM) per unit(rounded to the nearest dollar). $12.00

Next, complete the formula below to determine the break-even units.

Total Fixed Costs / Contribution Margin per Unit = Units

$4,800 /$12=400 units

APPLY THE CONCEPTS: Effect of Changes to Sales Price, Variable Costs and Fixed Costs

Now consider each of the following scenarios for Koller Products. Calculate the contribution margin (CM) per unit, rounded to nearest dollar, and the new break-even point in units, rounded to the nearest whole unit, for each scenario separately.

Scenario 1

Koller has been experiencing quality problems with a materials supplier. Changing suppliers will improve the quality of the product but will cause direct materials costs to increase by $1 per unit.

CM per unit: $_____________

Break-even units:____________units

Scenario 2

Koller will dispose of a machine in the factory. The depreciation on that equipment is $500 per month.

CM per unit: $_____________

Break-even units:____________units

Scenario 3

After some extensive market research, Koller has determined that a sales price increase of $2 per unit will not affect the sales volume and will be effective immediately.

CM per unit: $_____________

Break-even units:____________units