Question

Lindon company is the exclusive distributor for an automotive product that sells for $38 per unit and has a cm ratio of 30%. the company's fixed expenses are $180,000 per year. the company plans to sell 16,000 units this year.

required:

1. what are the variable expenses per unit?

2. using the equation method;

a. what is the break-even point in unit sales and in dollar sales?

b. what sales level in unit and dollar is required to earn an annual profit of $50,000?

4. assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3 per unit. what is the company's new break-even point in unit sales and in dollar sales?

Answer 1

(1) CALCULATION OF VARIABLE EXPENSES PER UNIT

as, sales price per unit - variable expenses per unit = contribution margin per unit

And contribution margin per unit = sales price per unit x contribution margin ratio

= $38 x 30% = $11.4

Therefore, variable expenses per unit = sales price per unit - contribution margin per unit

= $38 - $11.4

= $26.6

(2a) CALCULATION OF BREAK EVEN POINT

1.In unit sales,

Formula: break even point (units) = fixed expenses/contribution margin per unit

= $180000/$11.4

= 15789 units approximately

2. In dollar sales

Formula: break even point (dollar) = fixed expenses/contribution margin ratio

= $180000/0.30

= $600000

(2b) CALCULATION OF SALES LEVEL TO EARN ANNUAL PROFIT OF $50,000

for the sake of easy computation, let's take, desired annual profit + fixed expenses = revised fixed expenses

Therefore, break even point (units) = ($50000 + $180000)/$11.4

= $230000/$11.4

= 20175 units approximately

Also,

Break even point (dollar) = ($50000 + $180000)/0.30

= $230000/0.30

= $766666.67

(3) CALCULATION OF NEW BREAK EVEN POINT

New variable expenses per unit = $26.6 - $3 = $23.6

New contribution margin per unit = $38 - $23.6 = $14.4

And, new contribution margin ratio = $14.4/$38 = 0.3789 or 37.89%

Therefore,

New break even point (units) = $180000/$14.4

= 12500 units

New break even point dollars = $180000/0.3789

= $475059