Asked by Dustin Hedrick on Apr 26, 2024
Verified
Gardella Corporation has two divisions: Domestic Division and Foreign Division. The following data are for the most recent operating period: The common fixed expenses have been allocated to the divisions on the basis of sales.The company's overall break-even sales is closest to:
A) $449,317
B) $134,827
C) $470,663
D) $335,836
Break-Even Sales
The amount of revenue from sales at which a business covers its costs, without making a profit or incurring a loss.
Common Fixed Expenses
Overheads that are consistent in amount across different business segments, departments, or products.
Operating Period
The time frame during which a business operates to achieve its set objectives, which can be measured daily, monthly, quarterly, or annually.
- Learn and employ the theory of break-even sales when analyzing segments.
Verified Answer
Domestic Division break-even point = $242,000 ÷ (1 - 0.4 - 0.2) = $242,000 ÷ 0.4 = $605,000
Foreign Division break-even point = $214,000 ÷ (1 - 0.3 - 0.1) = $214,000 ÷ 0.6 = $356,667
Total break-even point = $605,000 + $356,667 = $961,667
To calculate the overall sales amount, we need to divide the total fixed expense by the overall contribution margin ratio:
Overall contribution margin ratio = (($605,000 × 0.6) + ($356,667 × 0.7)) ÷ (($605,000 + $242,000) + ($356,667 + $214,000)) = $660,667 ÷ $1,417,667 = 0.466
Overall fixed expense = $242,000 + $214,000 = $456,000
Overall break-even sales = $456,000 ÷ 0.466 = $978,731, rounded to the nearest thousand = $470,663
Therefore, the best choice is C.
Learning Objectives
- Learn and employ the theory of break-even sales when analyzing segments.
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