Question

Johnson, Inc. projects sales for next year will be 55,000 units if the sales price is $27.50. At this level, unit fixed costs will be $8.30 while total variable costs will be $693,000. The vice president of marketing advises management to reduce sales price to $26.00 and to undertake a national advertising campaign costing $12,000.

1. What is the breakeven point for the company in terms of dollars and units before giving effect to the vice president's plan?
2. What is the breakeven point in units after giving effect to the plan?
3. The vice president believes that his plan will result in a before tax earnings of $56,000. How many units must be sold to reach this earnings level?

Answer 1

Working Note1:
	Total	Per Unit
No. of Units	55,000
Sales	1,512,500	27.50
Less: Variable cost	693,000	12.60
Contribution margin	819,500	14.90
Less: Fixed cost	456,500
Net Income	363,000
Contribution margin ratio	54.18%
a) Break Even (Dollars) = Fixed cost / contribution margin ratio
=456600/54.18%
842,534
Break Even (Unit ) = Fixed cost / contribution margin per unit
=456600 / 14.9
30,644	Units
Working Note2: After Affect of Vice president
	Total	Per Unit
No. of Units	55,000
Sales	1,430,000	26.00
Less: Variable cost	693,000	12.60
Contribution margin	737,000	13.40
Less: Fixed cost	468,500
Net Income	268,500
Contribution margin ratio	51.54%
b) Break Even (Dollars) = Fixed cost / contribution margin ratio
=468500/51.54%
909,030
Break Even (Unit ) = Fixed cost / contribution margin per unit
=468500 / 13.4
34,963	Units
c) Target Units = (Total fixed cost + Target income / contribution margin per unit)
=(468500 +56000)/ 13.4
39,142	Units