Question

Lindon Company is the exclusive distributor for an automotive product that sells for $56.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $411,600 per year. The company plans to sell 29,300 units this year.

Required:

1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.)

2. What is the break-even point in unit sales and in dollar sales?

3. What amount of unit sales and dollar sales is required to attain a target profit of $243,600 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $5.60 per unit. What is the company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $243,600?

Answer 1

1. Variable expenses per unit = Selling price per unit * (1 - Contribution margin ratio)

= $56 * (1 - 0.3)

= $39.2

2. Contribution margin per unit = Selling price per unit * Contribution margin ratio

= $56 * 30%

= $16.8

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $411,600 / $16.8

= 24,500

Break-even point in dollar sales = Fixed expenses / Contribution margin ratio

= $411,600 / 30%

= $1,372,000

3. Unit sales required = (Fixed expenses + Target profit) / Contribution margin per unit

= ($411,600 + $243,600) / $16.8

= 39,000

Sales dollars required = (Fixed expenses + Target profit) / Contribution margin ratio

= ($411,600 + $243,600) / 30%

= $2,184,000

4. Variable expenses per unit = $39.2 - $5.6

= $33.6

Contribution margin per unit = Selling price per unit - Variable expenses per unit

= $56 - $33.6

= $22.4

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $411,600 / $22.4

= 18,375

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $22.4 / $56

= 0.4

Break-even point in dollar sales = = Fixed expenses / Contribution margin ratio

= $411,600 / 0.4

= $1,029,000

Sales dollars required = (Fixed expenses + Target profit) / Contribution margin ratio

= ($411,600 + $243,600) / 0.4

= $1,638,000