Question

Need answers in clear hand writing notes. If you can then attempt my questions other wise don't attempt my questions..

The income statement for Richard Machine Company for 2015 appears below.

RICHARD MACHINE COMPANY

Income Statement

For the Year Ended December 31, 2015

——————————————————————————————————————————

Sales (40,000 units).......................................................................................             $1,000,000

Variable expenses.........................................................................................                  700,000

Contribution margin.......................................................................................                  300,000

Fixed expenses..............................................................................................                  360,000

Net income (loss)...........................................................................................             $    (60,000)

Instructions

Answer the following independent questions and show computations using the contribution margin technique to support your answers:

1.   What was the company's break-even point in sales dollars in 2015?

2.   How many additional units would the company have had to sell in 2016 in order to earn net income of $45,000?

3.   If the company is able to reduce variable costs by $2.50 per unit in 2016 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $45,000?

Answer 1

1.

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

Contribution margin ratio = (Sales - Variable expenses) / Sales

= ($1,000,000 - $700,000) / $1,000,000

= 0.30

Break even point in sales dollar = $360,000 / 0.30

= $1,200,000

2.

Target sales in dollars = (Fixed expenses + Target net income) / Contribuion margin ratio

= ($360,000 + $45,000) / 0.30

= $1,350,000

Target sales in units = Target sales in dollars / Selling price

Selling price = $1,000,000 / 40,000 units

= $25

Target sales in units = $1,350,000 / $25

= 54,000 units

Additional units = 54,000 units - 40,000 units

= 14,000 units

3.

Variable cost per unit = Variable expenses / Units

= $700,000 / 40,000 units

= $17.50

Variable expenses reduces by $2.50

New Variable expenses per unit = $17.50 - $2.50

= $15.00

Selling price = $25

Contribution margin per unit = Selling price - Variable expenses

= $25.00 - $15.00

= $10.00

Target sales in units = (Fixed expenses + Target unit) / Contribution margin per unit

= ($360,000 + $45,000) / $10.00

= 40,500 units