Question

Lindon Company is the exclusive distributor for an automotive product that sells for $54.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $388,800 per year. The company plans to sell 28,600 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 $226,800 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $5.40 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Answer 1

Lindon Company :
We have been provided the following information :
Selling price per unit	54
CM Ratio	30%
Fixed expenses	388800
Sale (units)	28600 units
Requirement 1 :
Computation of variable expense per unit :
Selling price	54
Contribution margin = 30%	16.2	(54*30%)
Therefore, variable expense per unit = selling expense - contribution margin
54-16.2
37.8
Variable expense per unit	$37.80
Requirement 2 :
Break even point (In units) = Fixed costs / contribution margin per unit
Fixed expenses	388800
Contribution margin = 30%	16.2	(54*30%)
Break even point(in units)	24000	units
Break even point(in dollars) = Fixed cost / contribution margin ratio.
Fixed expenses	388800
Contribution margin = 30%
Break even sales (in dollars)	$ 1,296,000.00
Note : Break even is a point where, Revenues will equal expensesit is a zero operating income position
Requirement 3 :
Target profit	226800
What amount of unit sales and dollar sales is required to attain a target profit of $226,800 per year?
units required to attain target profit = (Fixed cost+Target profit)/Contribution per unit
Fixed expenses	388800
Target profit	226800
	615600
No of units required = 615600/16.2	38000	Units
Sales required to attain target profit = (Fixed cost+Target profit)/Contribution margin ratio
Fixed expenses	388800
Target profit	226800
	615600
Sales Required = 615600/30%	$    2,052,000.00
Requirement 4 :
Variable cost reduced by 5.4 per unit
Revised variable cost per unit = 37.8-5.4	$             32.40
Therefore,
Selling price	$               54.00
Less : variable cost per unit	$               32.40
Contribution per unit	$               21.60
Contribution margin ratio = 21.6/54*100	40%
Break even point (In units) = Fixed costs / contribution margin per unit
Fixed expenses	388800
Contribution margin = 40%	$               21.60
Break even point(in units)	18000	units
Break even point(in dollars) = Fixed cost / contribution margin ratio.
Fixed expenses	388800
Contribution margin = 40%
Break even sales (in dollars)	$    972,000.00
Note : Break even is a point where, Revenues will equal expensesit is a zero operating income position