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Assume that you are part of the accounting team for Clapton Productions. The company has only one product that sells for $20 per unit. Clapton estimates total fixed costs to be $9,800. Clapton estimates direct materials cost of $4.00 per unit, direct labor costs of $5.00 per unit, and variable overhead costs of $1.00 per unit.

Further analysis of Clapton Productions's fixed costs revealed that the company actually faces annual fixed overhead costs of $9,800 and annual fixed selling and administrative costs of $4,200. Variable cost estimates are correct: direct materials cost, $4 per unit; direct labor costs, $5 per unit; and variable overhead costs, $1 per unit. At this time, the selling price of $20 will not change. Complete the following formulas for the revised fixed costs. Enter the ratio as a percentage.

Contribution Margin per Unit

$20

$10

=

$10

Contribution Margin Ratio	=	$10	=	50%
		$ 20

Now complete the formulas for (1) the break-even point in sales dollars and (2) the units sold at the break-even point. To calculate this, divide the break-even point in sales dollars by the unit selling price.

Break-Even Point in Sales Dollars	=	$ 14000	=	$28000
		50 %

Units Sold at Break-Even Point

=

1400 units

Assume that the number of units that Clapton sold exceeded the break-even point by one (1).

How much would operating income be? $

What would operating income be if the units sold exceeded the break-even point by five (5) units? $

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