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Vault-Tec has annual fixed costs, excluding depreciation, of $1,000,000 and variable costs that are 75% of sales. If depreciation was $250,000, what was Vault-Tec's break-even level of sales?

Answer :

Final answer:

To find Vault-Tec's break-even level of sales, we calculate it as Fixed Costs / (1 - Variable Cost Ratio), with fixed costs of $1,000,000 and a variable cost ratio of 0.75. This results in $4,000,000 in sales needed to break even.

Explanation:

Break-Even Analysis in Business

To calculate Vault-Tec's break-even level of sales, we need to understand that break-even occurs when the total revenue equals the total costs. Here, the total costs include both fixed costs and variable costs. To find the break-even point in terms of sales dollars, we use the formula: Fixed Costs / (1 - Variable Cost Ratio).

Vault-Tec.’s fixed costs are $1,000,000 and the depreciation is $250,000, but since depreciation is a non-cash expense and does not affect the calculation in this context, we will exclude it. The variable costs are 75% of the sales, meaning the Variable Cost Ratio is 0.75. Putting these numbers into the formula gives us:

Break-even level of sales = $1,000,000 / (1 - 0.75) = $1,000,000 / 0.25 = $4,000,000.

Therefore, Vault-Tec would need to achieve $4,000,000 in sales to break even.

This same approach can be applied to any business scenario, like the vacuum cleaner manufacturer mentioned in the provided examples who has to calculate the number of units to sell at a given price to cover her costs. By understanding your costs and setting prices accordingly, a business can plan for the break-even price point and guarantee that its sales cover all expenses.

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