Compute the break-even sales using the contribution-margin ratio in the following case:
I have decided to open a pizza parlor in my hometown. I plan to deliver my pizzas in a four mile radius from my shop. My annual fixed expenses are $54,000. I will charge $10 for a pizza and it costs $6 to make and deliver each pizza. Do not calculate in income taxes.
The contribution margin ratio is the contribution margin divided by the sales.
The price of each pizza to be sold at the pizza parlor is $10 and the variable costs per pizza are $6. The contribution margin is $10 - $6 = $4. The contribution margin ratio is 4/10 = 0.4 = 40%
The break-even point in sales (in terms of dollars) is equal to total fixed expenses divided by the contribution margin ratio. The total fixed expenses of the pizza parlor are $54000. As the contribution sales margin is 40%, the break-even point is at a sales of 54000/0.4 = $135000
The pizza parlor breaks even when the sales are of $135000