USA Calculating Break-Even

[ekuemoah]

I have to find the break even units for a product. I am given the following information
2. Kaiser's Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs.

Why do I have to use this formula: Fixed Cost/Contribution Margin Per Unit?
Why can't I figure out what the total of the variable cost and fixed cost is and then divide it by the units sold to get the break-even dollars?(Is it because I do not know the total amount of units that were produced and therefore cannot say what the total variable costs will be? This would just tell me the amount needed to break even at that activity level or 7000 units.)

Thank You

 

[Triest123]

I have to find the break even units for a product. I am given the following information
2. Kaiser's Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs.

Why do I have to use this formula: Fixed Cost/Contribution Margin Per Unit?
Why can't I figure out what the total of the variable cost and fixed cost is and then divide it by the units sold to get the break-even dollars?(Is it because I do not know the total amount of units that were produced and therefore cannot say what the total variable costs will be? This would just tell me the amount needed to break even at that activity level or 7000 units.)

Thank You

=> Because the fixed costs per unit vary with the change in output units.
while the contribution margin per unit is constant (as they are all variable costs)

It is difficult to compute the fixed costs per unit precisely if the output level
is variable.

The Contribution Margin is the amount that is used to cover the total fixed costs.
So, when we know the contribution margin per unit, we can compute the
breakeven point without considering the fixed costs per unit.

 

[inessa]

Answer to CVP question

Break-even point is when profits = 0.

There are two steps to calculate the break-even point (in units) in this scenario:
1) Calculate the contribution margin per unit: selling price per unit -- variable cost per unit
2) Calculate the break-even sales (in units): fixed costs divided by contribution margin per unit

Steps:
1) Contribution margin is the difference between sales and variable costs. Essentially, contribution margin covers fixed costs and profits.

Contribution = Variable costs + profits
At break-even: profits = 0
At break-even: contribution = variable costs + profits = variable costs + 0

Contribution margin per unit divides total contribution margin by the number of units sold.

In this case, contribution margin per unit equals: ($70,000 - $28,000) / 7,000 = $6

$6 per unit sold contributes toward fixed costs and profits.


2) So how many units do we need to sell to cover fixed costs and make 0 profit?

Break-even point in units: fixed costs / contribution per unit

In this case, break-even point in units equals: $12,000 / $6 = 2,000 units

If we sell 2,000 units, we will break even in this case:
Sales - variable costs - fixed costs = 0.
(2,000 units x $10 sales price per unit) - (2,000 units x $4 variable cost per unit) - $12,000 = 0.

Answer: 2,000 units

To learn more about cost-volume-profit analysis, refer to the tutorial on Simplestudies.
Accounting Cost-Volume-Profit Analysis: Online Accounting Tutorial & Questions | Simplestudies.com