Trendy Toes produces sports socks. The company has fixed expenses of $85,000 and variable expenses of $1.20 per package. Each package sells for $2.00. Requirements:
1. Compute the contribution margin per package and the contribution margin ratio.
2. Find the breakeven point in units and in dollars.
3. Find the number of packages Trendy Toes needs to sell to earn a $26,000 operating income.

Results are below.

Explanation:

To calculate the contribution margin and contribution margin ratio we need to use the following formulas:

contribution margin= selling price - unitary variable cost

contribution margin= 2 - 1.2= 0.8

contribution margin ratio= contribution margin / selling price

contribution margin ratio= 0.8 / 2

contribution margin ratio= 0.4

Now, we can calculate the break-even point in units and dollars:

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

Break-even point in units= 85,000 / 0.8

Break-even point in units= 106,250

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 85,000 / 0.4

Break-even point (dollars)= $212,500

Finally, the desired profit is $26,000:

Break-even point in units= (fixed costs + desired profit) / contribution margin per unit

Break-even point in units= 111,000 / 0.8

Break-even point in units= 138,750

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