Question

- XYZ Company sells its only product for $40 per unit. Its total fixed costs are $180,000 per annum. Its CM ratio is 20%. XYZ plans to sell 16,000 units this year.

Required:

1. Calculate CM per unit and the variable cost per unit.

2. Calculate break-even point in unit sales and in dollar sales?

3. Calculate the unit sales and dollar sales required to achieve a target profit of $60,000 per year?

4. Assume that the company is able to reduce its variable costs by $4 per unit and accordingly the sales price per unit will also be reduced by 5%.

1. Calculate the company’s new break-even point in unit sales and in dollar sales?
2. Calculate dollar sales required to achieve a target profit of $60,000?

5. In your opinion, did you think the company would be better off with the assumed reductions in

    (4)? Why?    

Answer 1

Selling price = $40

Contribution margin ratio = 20%

Contribution margin = 40*20% = $8

Variable cost = Selling price - Contribution margin

= 40 - 8

= $32

2)

Breakeven sales = Fixed cost/ contribution margin

Breakeven sales in dollars = Fixed cost/ contribution margin ratio

Breakeven sales

= 180,000/8

= 22,500 units

Breakeven sales in dollars

= 180,000/20%

= $900,000

3)

Sales to be made to earn $60,000

= ( Fixed cost + Target profit)/ Contribution margin

= ( 60,000 + 180,000)/8

= 30,000 units

In dollars

= ( 60,000 + 180,000)/20%

= $1,200,000

4)

Revised variable cost = 32 - 4 = $28

Revised Selling price = 40 - 5%*40 = 38

Contribution margin = 38 - 28 = $10

Contribution margin ratio = 10/38 = 26.32%

Breakeven sales

= 180,000/10

= 18,000 units

In dollars

= 180,000*38

= $684,000

B)

Dollar sales required to achieve $60,000

= ( 180,000 + 60,000)/10

= 24,000 units

Sales = 24,000*38 = $912,000

5)

As the Breakeven sales have reduced after the reduction in the variable cost and selling price therefore the company will be in a better position.

If you find the answer helpful please upvote.