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We will now take a look at an example of the type of question you may be asked in one of your exams and we will go through a step by step solution.
Imagine a company, ABC Lighting, manufactures a standard lamp as part of their product range.
The following information is available to us.
We can see that the selling price per unit is $28.
The variable manufacturing costs are $12 per unit.
Fixed manufacturing costs are $300,000 Variable marketing , admin and selling costs
are $5 per unit
Fixed admin and selling costs are $430,000 Annual volume is 100 000 units
The equation is, Contribution Margin per unit = Selling price per unit
- Variable manufacturing costs - Variable marketing, admin and selling costs.
We can now substitute this equation with figures given to us in the table. That is,
Selling price per unit = $28, Variable manufacturing costs per unit = $12,
and Variable marketing, admin and selling costs per unit = $5
Therefore, Contribution Margin per unit = $28 - $12 - $5
Therefore the Contribution Margin per unit is $11
We might then be asked to find the number of units that need to be sold annually to
break even.
The equation for this is, Breakeven units = Fixed costs divided by Contribution Margin per unit.
We can now substitute the equation with the figures given to us.
That is, Fixed manufacturing costs are $300,000, Fixed admin and selling costs is $430,000,
Contribution margin per unit is $11
Therefore, Breakeven units = ($300,000 + $430,000) divided $11, which equates to 66, 364.
This means that ABC Lighting will need to manufacture 66, 364 standard lamps in order
to break even.