Question

Heli Manufacturing produces headphones and has been suffering from heightened competition. The following tables highlights the results of Heli’s operations for 2019:

Sales (12500 units @ $84)	$ 1 050 000
Variable (12 500 @ $63)	787 500
Contribution Margin	$   262 500
Fixed Costs	296 100
Operating Profit (loss)	($ 33 600)

Required:

1. Compute Heli’s breakeven point in both units and dollars.
2. (1 mark) Compute the contribution margin ratio.
3. What will be the required sales, in both units and dollars, to generate a pre-tax profit of $30 000.
4. Prepare a contribution margin income statement for sales of 16,481 units.
5. Refer to the original data. The Vice President, Marketing feels that a 10% reduction in price, in combination with a $40 000 increase in advertising will cause sales to increase by 25%. What effect would this strategy have on operating profit (loss)?

Answer 1

Part-a : Computation of BEP in Unit & Dollar Sales
BEP in Unit = Fixed Cost/ Contribution Margin Per Unit
296100/21=14100 Unit
*Contribution Margin per unit= Selling Price- Variable Cost
=84-63= $21 per Unit
BEP in $= BEP in Unit X Selling Price
=14100*84= $1184400
Partb Computation of CM Ratio
CM Ratio= Contribution / Sales
=21/84=25%
Part-c
No. of Unit= (Fixed Cost + Target Income )/ CM Per Unit
=(296100+30000)/21= 15529Apprx

Part-d- Contribution Margin Income Sstatement
Particular	Amount
Unit Sold	16481
Sales	$1,384,404
Variable Expenses	-$1,038,303
Contribution Margin	$346,101
Fixed Expenses	-$296,100
Net Operating Income	$50,001

Part-e- Contribution Margin Income Sstatement
Particular	Amount
Sales (12500*125%)*(84*90%)	$1,181,250
Variable Expenses (12500*1.25*63)	-$984,375
Contribution Margin	$196,875
Fixed Expenses	-$336,100
Net Operating Income	-$139,225

Net Operatign income will be decreased by $105625