13SE - Horngren'S Financial And Managerial Accounting

Question

Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month. 

 

Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.

Step-by-Step Solution

Answer

The breakeven sales in dollars is $577,500. 

Calculation of Contribution margin ratio

$\begin{array}{c}\mathrm{Contribution} \mathrm{margin}=\mathrm{Sales} \mathrm{price}–\mathrm{Variable} \mathrm{cost}\\ =\$70-\$42\\ =\$28\\ \mathbf{Contribution}\mathbf{ }\mathbf{margin}\mathbf{ }\mathbf{ratio}\mathbf{=}\frac{\mathrm{Contribution} \mathrm{margin} \mathrm{per} \mathrm{unit}}{\mathrm{Sales} \mathrm{revenue}}\\ \mathbf{=}\frac{\$28}{\$70}\\ =40\%\end{array}$

Calculation of breakeven point in sales dollars

$\begin{array}{c}\mathbf{Sales}\mathbf{ }\mathbf{required}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{dollars}\mathbf{=}\frac{\mathrm{Fixed} \mathrm{cost}+\mathrm{Target} \mathrm{profit}}{\mathrm{Contribution} \mathrm{margin} \mathrm{ratio}}\\ \mathbf{=}\frac{\$231,000+\$0}{40\%}\\ =\$577,500\end{array}$

Calculation of breakeven point in sales units

$\begin{array}{c}\mathbf{Sales}\mathbf{ }\mathbf{required}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{units}\mathbf{=}\frac{\mathrm{Fixed} \mathrm{cost}+\mathrm{Target} \mathrm{profit}}{\mathrm{Contribution} \mathrm{margin} \mathrm{ratio}}\\ \mathbf{=}\frac{\$231,000+\$0}{\$28}\\ =8,250\end{array}$