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Sales price $2.00 per unit Variable costs $0.80 per unit Fixed costs $400,000.00 per month 1....

Sales price $2.00 per unit Variable costs $0.80 per unit Fixed costs $400,000.00 per month 1. a. What number must Balance sell to break even? 2. b. What do the sales have to be to make an operating profit of $100,000.00? 3. c. Balance has just learned that the variable costs will increase to $1.05, but the fixed costs can be reduced to $380,000.00. What will the new selling price needed to be to maintain the target volume in sales dollars as recorded in b.? Assume that the company plans to sell 500,000 units per month. Consider requirements d., e. and f. independently of each other Assume that the company plans to sell 500,000 units per month. Consider requirements d., e. and f. independently of each other d. What will be the operating profit? e. Suppose that fixed costs are 10.00% lower than projected and variable costs per unit are 10.00% higher than projected. What impact will these cost changes have on operating profit?

Solutions

Expert Solution

Answer a.

Selling Price per unit = $2.00
Variable Costs per unit = $0.80
Fixed Costs = $400,000

Contribution Margin per unit = Selling Price per unit - Variable Costs per unit
Contribution Margin per unit = $2.00 - $0.80
Contribution Margin per unit = $1.20

Breakeven Point in unit sales = Fixed Costs / Contribution Margin per unit
Breakeven Point in unit sales = $400,000 / $1.20
Breakeven Point in unit sales = 333,333

Answer b.

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $1.20 / $2.00
Contribution Margin Ratio = 60%

Required Sales = (Fixed Costs + Operating Profit) / Contribution Margin Ratio
Required Sales = ($400,000 + $100,000) / 0.60
Required Sales = $833,333

Answer c.

Variable Costs per unit = $1.05
Fixed Costs = $380,000
Required Sales = $833,333

Required Sales = (Fixed Costs + Operating Profit) / Contribution Margin Ratio
$833,333 = ($380,000 + $100,000) / Contribution Margin Ratio
$833,333 = $480,000 / Contribution Margin Ratio
Contribution Margin Ratio = 0.5760

Contribution Margin Ratio = (Selling Price per unit - Variable Costs per unit) / Selling Price per unit
0.5760 = (Selling Price per unit - $1.05) / Selling Price per unit
0.5760 * Selling Price per unit = Selling Price per unit - $1.05
$1.05 = 0.4240 * Selling Price per unit
Selling Price per unit = $2.48

Answer d.

Selling Price per unit = $2.00
Variable Costs per unit = $0.80
Fixed Costs = $400,000
Number of units sold = 500,000

Operating Profit = (Selling Price per unit - Variable Costs per unit) * Number of units sold - Fixed Costs
Operating Profit = ($2.00 - $0.80) * 500,000 - $400,000
Operating Profit = $200,000

Answer e.

Selling Price per unit = $2.00
Number of units sold = 500,000

Variable Costs per unit = $0.80 + 10% * $0.80
Variable Costs per unit = $0.88

Fixed Costs = $400,000 - 10% * $400,000
Fixed Costs = $360,000

Operating Profit = (Selling Price per unit - Variable Costs per unit) * Number of units sold - Fixed Costs
Operating Profit = ($2.00 - $0.88) * 500,000 - $360,000
Operating Profit = $200,000

Changes in costs does not have any impact on operating profit.

ekkarill92 answered 6 hours ago
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