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.
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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
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