A company has fixed costs of $20,000 and a contribution margin ratio of 25%. Wha
Practice Questions
Q1
A company has fixed costs of $20,000 and a contribution margin ratio of 25%. What is the sales revenue needed to break even?
$80,000
$100,000
$60,000
$40,000
Questions & Step-by-Step Solutions
A company has fixed costs of $20,000 and a contribution margin ratio of 25%. What is the sales revenue needed to break even?
Step 1: Identify the fixed costs. In this case, the fixed costs are $20,000.
Step 2: Identify the contribution margin ratio. Here, the contribution margin ratio is 25%, which can also be written as 0.25.
Step 3: Use the break-even formula. The formula to find break-even sales revenue is: Break-even Sales Revenue = Fixed Costs / Contribution Margin Ratio.
Step 4: Plug in the values into the formula. So, it becomes: Break-even Sales Revenue = $20,000 / 0.25.
Step 5: Calculate the result. When you divide $20,000 by 0.25, you get $80,000.
Step 6: Conclusion. The sales revenue needed to break even is $80,000.
Break-even Analysis – The process of determining the sales revenue needed to cover fixed and variable costs, resulting in neither profit nor loss.
Contribution Margin Ratio – The percentage of each sales dollar that contributes to covering fixed costs and generating profit after variable costs are deducted.
