Alternatives to reduce breakeven sales Wolf Broadcasting ope

Alternatives to reduce break-even sales. Wolf Broadcasting operated at the break-even point of $2,250,000 during Year 1 while incurring fixed costs of $1,000,000. Management is considering two alternatives to reduce the break-even level. Alternative A trims fixed costs by $200,000 annually with no change in variable cost per unit; doing so, however, will reduce the quality of the product and result in a 10 percent decrease in selling price, but no change in the number of units sold. Alternative B substitutes automated equipment for certain operations now performed manually. Alternative B will result in an annual increase of $300,000 in fixed costs but a 5 percent decrease in variable costs per barrel produced, with no change in product quality, selling price, or sales volume. a. What was the total contribution margin (contribution margin per unit times number of units sold) during Year 1? b. What is the break-even point in sales dollars under alternative A?

Solution

contribution margin often differs from gross margin as contribution margin considered only variable cost while calculating contribution margin whereas gross margin considered fixed overhead cost while calculating gross margin (which is not considered while calculating contribution margin )

In other words :

Contribution margin =Sales revenue -variable cost of sales -variable selling cost (if any,which is not considered while calculating gross margin)

Gross margin = sales revenue -cost of goods sold **(includes both variable cost of sales and fixed overhead cost)

**fixed overhead cost not considered while calculating contribution margin (only variable cos of sales is taken)