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On-The-Go Merchandiser sells luxury carry-on travel bags for $1,200 each. The firm's fixed operating costs are $600,000 when 5,000 or fewer bags are produced, and its variable cost ratio is 80 percent (i.e., variable cost per unit is 80 percent of the selling price). What is On-The-Go's operating breakeven point

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Answer:

On-The-Go Merchandiser

Operating break-even point:

a) in sales dollars = $3,000,000

b) in sales unit = 2,500 units

Explanation:

a) Data and Calculations:

Selling price per unit = $1,200

Fixed operating costs = $600,000

Capacity level = 5,000

Variable cost ratio = 80%

Variable cost per unit = $960 ($1,200 * 80%)

Contribution margin per unit = $240 ($1,200 - $960)

Contribution margin ratio = $240/$1,200 = 0.2

Operating break-even point:

a) in sales dollars = Fixed operating costs/Contribution margin ratio

= $600,000/0.2 = $3,000,000

b) in sales unit = Fixed operating costs/Contribution margin per unit

= $600,000/$240 = 2,500 units

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