Question

Lindon Company is the exclusive distributor for an automotive product that sells for $48.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $324,000 per year. The company plans to sell 26,500 units this year.

A. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.80 per unit. What is the company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $180,000?

Answer 1

	Per unit	Current level	Working
Sales	48	1,272,000	26500 units X $ 48 Per unit
Less : Variable cost	33.6	890,400	1272000-381600
Contribution	14.4	381,600	1272000 X 30/100
Less : Fixed cost		324,000
Profit		57,600	381600-324000
New BEP after the reduction of variable expenses by$4.8 per unit
BEP= Fixed cost /contribution per unit	16875 units	324000/(14.4+4.8)
BEP in Dollars = BEP in units Multiplied with Selling price per unit	810000	16875 units $48 per unit
BEP in units is 16875 and in dollars $810000
To get desired profit of $180000
Desired sales in units = Fixed cost + desired profit/ contribution per unit	26250	(324000+180000)/(14.4+4.8)
Desired sales in Value = Desired sales in units multiplied with selling price	1260000	26250 units X $48 per unit
to get desired profit we have to get the desired income of $1260000
the desired profit is calculated based upon revised contribution that is $19.2 (14.4+4.8)