If a company has fixed costs of $60,000 and a contribution margin ratio of 40%,

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Question: If a company has fixed costs of $60,000 and a contribution margin ratio of 40%, what is the sales required to break even?

Options:

Correct Answer: $150,000

Solution:

Break-even sales = Fixed Costs / Contribution Margin Ratio = $60,000 / 0.40 = $150,000.

If a company has fixed costs of $60,000 and a contribution margin ratio of 40%, what is the sales required to break even?

If a company has fixed costs of $60,000 and a contribution margin ratio of 40%, what is the sales required to break even?

Step 1: Identify the fixed costs. In this case, the fixed costs are $60,000.
Step 2: Identify the contribution margin ratio. Here, the contribution margin ratio is 40%, which can be written as 0.40 in decimal form.
Step 3: Use the break-even formula. The formula to calculate break-even sales is: Break-even sales = Fixed Costs / Contribution Margin Ratio.
Step 4: Plug in the values into the formula. So, you will calculate: $60,000 / 0.40.
Step 5: Perform the division. When you divide $60,000 by 0.40, you get $150,000.
Step 6: Conclusion. The sales required to break even is $150,000.

Break-even Analysis – This concept involves calculating the sales level at which total revenues equal total costs, resulting in no profit or loss.
Contribution Margin Ratio – This ratio indicates the percentage of sales revenue that exceeds total variable costs, contributing to fixed costs and profit.