Managerial Accounting: Break-Even Point Problem Using Price, Variable Cost, and Fixed Costs

Question

You are consulting for a local organic soap company. Each bar of soap sells for $8, and the variable cost to produce each bar is $3. The company has fixed monthly costs of $5,000 (for rent, salaries, and utilities).

Question:

How many bars of soap must they sell to break even? And what is the break-even sales revenue?

Answer 1

To figure out how many bars of soap the company needs to sell to break even (cover all costs), we need to find the point where they make enough money to pay for both their fixed costs ($5,000 per month) and variable costs ($3 per bar). Each bar sells for $8.

Step 1: Find the profit per bar

1. They sell each bar for $8, but it costs $3 to make.
2. Profit per bar = Selling price - Cost to make = $8 - $3 = $5

Step 2: Find how many bars cover the fixed costs

1. They have $5,000 in fixed costs (like rent and salaries).
2. To cover $5,000, divide the fixed costs by the profit per bar: $5,000 ÷ $5 = 1,000 bars

Step 3: Find the total sales money needed

1. If they sell 1,000 bars at $8 each, the total money is: 1,000 × $8 = $8,000

Answer:

1. They need to sell 1,000 bars to break even.
2. The total sales needed is $8,000.

Answer 2

Let's break it down step-by-step:

Given Information:

1. Selling price per bar = $8
2. Variable cost per bar = $3
3. Fixed monthly costs = $5,000

Step 1: Calculate Contribution Margin per Bar

Contribution margin = Selling price – Variable cost

Contribution margin = $8 – $3 = $5 per bar

Step 2: Find the Break-Even Point (Units)

Break-even (units) = Fixed costs ÷ Contribution margin per unit

Break-even (units) = $5,000 ÷ $5

Break-even (units) = 1,000 bars

They must sell 1,000 bars of soap to break even.

Step 3: Find the Break-Even Sales Revenue

Break-even sales revenue = Break-even units × Selling price per unit

Break-even sales revenue = 1,000 × $8 = $8,000

Their break-even sales revenue is $8,000.

Final Answer:

1. Break-even units = 1,000 bars
2. Break-even sales revenue = $8,000

Answer 3

Excellent Previous Answer.

It is clear and broken out into multiple steps.

The equation in the 2 steps of the previous answer can be shown as such.

Fixed Costs / (selling price - variable cost). = 5,000 / (8 - 3)

Selling price - Variable Cost is known as the Contribution Margin.

Selling Price $8,000

Variable Costs 3,000

Contribution Margin 5,000

Fixed Costs 5,000

Profit -0-