Question

Lindon Company is the exclusive distributor for an automotive product that sells for $36.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $210,600 per year. The company plans to sell 22,300 units this year.

Required:

1. What are the variable expenses per unit?

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 $102,600 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.60 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Answer 1

1.

Variable expenses ratio = 1- Contribution margin ratio

= 1- 30%

= 70%

Variable expenses per unit = Selling price per unit * Variable expenses ratio

= $36 * 70%

= $25.2

2.

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

= $36 - $25.2

= $10.8

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

= $210,600 / $10.8

= 19,500 units.

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

= $210,600 / 30%

= $702,000

3.

Unit sales required = (Fixed costs + Target profit) / Contribution margin per unit

= ($210,600 + $102,600) / $10.8

= 29,000 units.

4.

Variable expenses per unit = $25.2 - $3.6 = $21.6

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

= $36 - $21.6

= $14.4

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

= $210,600 / $14.4

= 14,625 units.

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

= $14.4 / $36

= 40%

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

= $210,600 / 40%

= $526,500