Question

Randolph runs a lemonade stand and wants to make $150 in the next week. He sells each cup of lemonade for $0.75, while the variable cost is $0.15 for the cups and ingredients. Fixed costs such as posters and signs are $15.

Calculate the following:

a. Contribution margin per unit sold

b. Contribution margin ratio

c. Breakeven point in units

d. Units to be sold to earn the targeted operating income

Answer 1

a.	Contribution per unit sold	=	$               0.60
b.	Contribution margin ratio	=	80%
c.	Unit Break - even point	=	25	units
d.	Unit sales needed to attain target profit	=	275	units
	Workings:
(i)	Sales Price per unit	=	$               0.75
Less:	Variable cost per unit	=	$               0.15
(ii)	Contribution per unit sold	=	$               0.60
(ii) / (i)	Contribution margin ratio	=	80%
	Fixed cost	=	$                   15
	Unit Break - even point	=	Fixed cost / Contribution per unit
		=	$15 / $0.60
		=	25	units
	Target Profit	=	$                 150
	Unit sales needed to attain target profit	=	(Fixed cost + Target profit) / Contribution margin ratio
		=	($15 + $150) / $0.60
		=	275	units