Question

Lindon Company is the exclusive distributor for an automotive product that sells for $28.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $147,000 per year. The company plans to sell 19,500 units this year.

Required:

1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.)

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 $63,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.80 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 $63,000?

Answer 1

Basic Data:

                Fixed cost = $ 147,000

                CM ratio = 30%

                Unit selling price = $ 28

                Units = 19500 units

1. Variable Expenses per unit

Variable expense per unit = Unit selling price*(1-CM ratio)

                                                     = $ 28*(1-0.30)

                                                     = $19.60

1. Compute the anticipated Break Even Point

Break Even Point is a point at which there will be no profit or loss. At Break Even Point the company will recover the fixed cost and there will be no profit and no loss. It can be computed as follows:

Break Even Point in units= Total Fixed cost / Contribution margin per unit

Contribution margin per unit= Unit selling price - Unit Variable cost

= $ 28 - $ 19.60

= $ 8.40

Therefore, Break Even Point in units= $ 147,000 / $ 8.40

                                                                                = 17,500 units

Break Even Point in Dollar sales= Total Fixed cost / Contribution margin ratio

                                                                = $ 147,000 / 0.30

                                                                = $490,000

1. Compute the sales units required to realize an operating income of $ 63,000.

The required profit is $ 63,000 and the total fixed cost is $ 147,000. Contribution per unit is $ 8.40. Then the number of units can be found out as follows

Required profit	$ 63,000
Add: Total Fixed cost	$ 147,000
Total Contribution required	$ 210,000
Contribution margin per unit	$ 8.40
No .of unit (Total Contribution required/ Contribution margin per unit)	25000
Dollar sales(No.of units*unit selling price)	25000*$28= $700,000

1. Revised variable cost = $19.60-$2.80= $16.80

Revised contribution = $28-$16.80= $11.20

New Contribution margin ratio = $11.20/ $28 =40%

New Break Even Point in units= Total Fixed cost / Contribution margin per unit

= $ 147,000/ $11.20

= 13125 units

New Break Even Point in Dollar sales= Total Fixed cost / Contribution margin ratio

                                                                = $ 147,000 / 0.4

                                                                = $ 367,500

Sales required to earn a profit of $ 63,000 :

Required profit	$ 63,000
Add: Total Fixed cost	$ 147,000
Total Contribution required	$ 210,000
Contribution margin per unit	$ 11.20
No .of unit (Total Contribution required/ Contribution margin per unit)	18,750
Dollar sales(No.of units*unit selling price)	18750*$28= $525,000