2.	The operating budget of the Bea Company contains the following information:
Sales at 80% of capacity		$400 000
Fixed cost	$105 000	
Variable cost	260 000	
Total cost		365 000
Net income		35000
             (a)Compute
the contribution margin;
the contribution rate.
(b)Compute the break-even point
as a percent of capacity;
in sales dollars.
(c)Determine the break-even point in sales dollars if fixed cost is reduced by $11 200, while variable cost is changed to 72% of sales.


### (a) Compute the contribution margin and the contribution rate

#### 1. **Contribution Margin**
The contribution margin is calculated by subtracting the variable cost from the sales:

\[
\text{Contribution Margin} = \text{Sales} - \text{Variable Cost}
\]

\[
\text{Contribution Margin} = 400,000 - 260,000 = 140,000
\]

#### 2. **Contribution Rate**
The contribution rate (or contribution margin ratio) is the contribution margin as a percentage of sales:

\[
\text{Contribution Rate} = \frac{\text{Contribution Margin}}{\text{Sales}} \times 100
\]

\[
\text{Contribution Rate} = \frac{140,000}{400,000} \times 100 = 35\%
\]

### (b) Compute the break-even point

#### 1. **Break-Even Point as a Percent of Capacity**
The break-even point in units or sales occurs where total revenue equals total cost (or where net income is zero). To calculate the break-even point as a percentage of capacity:

\[
\text{Break-Even Point (in \% of Capacity)} = \frac{\text{Fixed Cost}}{\text{Contribution Margin}} \times 100
\]

\[
\text{Break-Even Point} = \frac{105,000}{140,000} \times 100 = 75\%
\]

#### 2. **Break-Even Point in Sales Dollars**
The break-even point in sales dollars is:

\[
\text{Break-Even Point (in Sales Dollars)} = \frac{\text{Fixed Cost}}{\text{Contribution Rate}}
\]

\[
\text{Break-Even Point} = \frac{105,000}{0.35} = 300,000
\]

### (c) Compute the break-even point if fixed cost is reduced by $11,200, and variable cost is changed to 72% of sales

#### 1. **New Fixed Cost**
If the fixed cost is reduced by $11,200:

\[
\text{New Fixed Cost} = 105,000 - 11,200 = 93,800
\]

#### 2. **New Variable Cost**
The variable cost is now 72% of sales. Therefore, the contribution margin rate is:

\[
\text{New Contribution Rate} = 1 - 0.72 = 0.28 \text{ or } 28\%
\]

#### 3. **New Break-Even Point in Sales Dollars**
The new break-even point in sales dollars is calculated by dividing the new fixed cost by the new contribution rate:

\[
\text{New Break-Even Point (in Sales Dollars)} = \frac{\text{New Fixed Cost}}{\text{New Contribution Rate}}
\]

\[
\text{New Break-Even Point} = \frac{93,800}{0.28} = 335,000
\]

### Summary of Results:
- **Contribution Margin**: $140,000
- **Contribution Rate**: 35%
- **Break-Even Point as a Percent of Capacity**: 75%
- **Break-Even Point in Sales Dollars**: $300,000
- **New Break-Even Point with Adjusted Costs**: $335,000

Would you like further details or clarifications on any of these points?

#### Related Questions:
1. How does a higher contribution rate affect break-even sales?
2. What would be the break-even point if sales were 90% of capacity?
3. How does changing the fixed cost impact the contribution margin?
4. How can the company reduce its break-even point effectively?
5. What would happen if variable costs increased to 80% of sales?

#### Tip:
Always monitor the contribution margin closely, as it directly influences profitability and break-even points.

The operating budget of the Bea Company contains the following information: Sales at 80% of capacity $400,000, Fixed cost $105,000, Variable cost $260,000, Total cost $365,000, Net income $35,000. (a) Compute the contribution margin; the contribution rate. (b) Compute the break-even point as a percent of capacity; in sales dollars. (c) Determine the break-even point in sales dollars if fixed cost is reduced by $11,200, while variable cost is changed to 72% of sales.

Explore the operating budget of Bea Company with a detailed breakdown of contribution margin, contribution rate, and break-even analysis. Calculate break-even points both as a percentage of capacity and in sales dollars, while adjusting for changes in fixed and variable costs. Suitable for undergraduate business and economics students.

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