Let’s see if we can help Charlie and his problem, which has become "our problem." Recall from our discussion of the breakeven point that:

• Breakeven in units = TFC/[CM/unit]
  •  where TFC = total fixed costs and CM = contribution margin
  • and the contribution margin is selling price minus variable cost/unit

Charlie’s variable costs were $195/unit. Revenues were $325/unit, and fixed costs were $520/month. The contribution margin is revenue minus variable costs, or $130. Let X = the breakeven number of units. Putting it all together, we get: the following:

1. 325X - 195X - 520 = 0, where 325X represents total revenue and 195X represents total variable costs.

2. 130X = 520

3. X = 520/130

4. X = 4

So, Charlie's contribution margin is $130 per unit and his breakeven point is 4 units per month. Let's do some more analysis to see if we can provide even greater insight into the nature of Charlie's operation.

Copyright © 2004 Gerald M. Myers. All rights reserved. This site has been developed as aid to instructors and students in managerial accounting. The scenarios contained herein are not intended to reflect effective or ineffective handling of managerial situations. Any resemblance to existing organizations is purely coincidental.

Last modified: August 03, 2005