HomeCraft makes wooden play sets. The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year. Each play set requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs of $100. Fixed advertising expenses equal $100,000 per year. Each play set sells for $3,200. What is HomeCraft's break-

325 play sets

Explanation:

The computation of the break even point in unit sales is shown below:

= Fixed cost ÷ (Selling price per unit - variable cost per unit)

where,

Fixed cost is

= Annual rent + salaries + Fixed advertising expenses

= $400,000 + $150,000 + $100,000

= $650,000

Variable cost is

= $70 × 10 + $400 + $100

= $1,200

Now the contribution margin is

= $3,200 - $1,200

= $2,000

So, the break even point is

= $650,000 ÷ $2,000

= 325 play sets

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