Question

In: Accounting

Lindon Company is the exclusive distributor for an automotive product that sells for $45 per unit...

Lindon Company is the exclusive distributor for an automotive product that sells for $45 per unit and has a CM ratio of 20%. The company’s fixed expenses are $108,000 per year. The company plans to sell 14,000 units this year.

Required: 1. What are the variable expenses per unit?

2. Use the equation method:

a. What is the break-even point in unit sales and in dollar sales?

b. What amount of unit sales and dollar sales is required to earn an annual profit of $63,000?

c. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $9 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

3. Repeat (2) above using the formula method.

a. What is the break-even point in unit sales and in dollar sales?

b. What amount of unit sales and dollar sales is required to earn an annual profit of $63,000?

c. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $9 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Solutions

Expert Solution

Break even point is the sales at which there is no profit no loss.

equation method.

(1) variable cost per unit = sales cost per unit (1-contribution margin ratio)

=$45 (1-0.20)

=$36

(2a) Break even point

suppose break even units are X

Profit at break even = $0

CM per unit = Sales* CM ratio

$45*20%

=$9

Profit = Unit CM*X-fixed expenses

$0 = $9*X - $108,000

X=12,000 units

Break even dollars = 12,000 units*$45 sales price per unit

=$540,000

(2b)

profit=unit Cm*X-fixed expenses

$63,000 = $9*X- $108,000

9X = $171,000

X=19,000 units

Break even sales = 19,000 units*$45

=$855,000

(2c)new variable cost= $36-$9

=$27

Break even point

suppose break even units are X

Profit at break even = $0

CM per unit = Sales-variable cost

$45-$27

=$18

Profit = Unit CM*X-fixed expenses

$0 = $18*X - $108,000

X=6,000 units

Break even dollars = 6,000 units*$45 sales price per unit

=$270,000

(3A)

formula method

Break even point = fixed expenses /CM per unit

$108,000/$9

=12,000units

Break even sales = fixed expenses/CM ratio

$108,000/20%

=$540,000

3b)

Break even point = (targeted profit+fixed expenses)/contribution per unit

($63,000+$108,000)/$9

=19,000 units

sales in dollar = (targeted profit+fixed expense)/CM ratio

($63,000+$108,000)/0.20

=$855,000

3c)

new variable cost= $36-$9

=$27

New Contribution= ($45-$27) =$18

CM ratio = Contribution margin/sales=$18/$45

=40%

Break even point

Break even point = (targeted profit+fixed expenses)/contribution per unit

($108,000)/$18

=6,000 units

sales in dollar = (targeted profit+fixed expense)/CM ratio

($108,000)/0.40

=$270,000


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