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In: Accounting

Last year, Alpha Company sold 3,600 units of a single product at a price of $100...

Last year, Alpha Company sold 3,600 units of a single product at a price of $100 per unit. The company variable cost per unit was $75, its fixed cost for the year were $40,000.

How many units must ALPHA sell to break even?

What is ALPHA’s operating leverage?

How much will ALPHA need to sell in sales dollars to earn a target profit of $80,000?

If ALPHA spends $18,000 and a proposed marketing campaign, it expects that sales would increase by 15%. Should ALPHA approve the proposed marketing campaign (YES or NO)

If ALPHA drops the unit price to $90, variable costs increase to $80, and fixed costs are reduced by $10,000, how many units will ALPHA need to sell to break even?

Solutions

Expert Solution

Last Year Data : Current :
How much will ALPHA need to sell in sales dollars to earn a target profit of $80,000?
Number of units Sold 3600
Selling price per unit $100 Desired sales (in Dollars) =( Fixed costs + Desired profit ) / Contribution Margin ratio
Variable cost per unit $75
Fixed cost $40,000 Contribution margin ratio = contribution / sales *100 25 %
Break even Formula (Units) = Fixed costs / Contribution per unit Therefore, Desired sales = (40000+80000)/25% $        480,000.00
Calculation of Contribution per unit = Selling price per unit - Variable cost per unit
100-75 If ALPHA spends $18,000 and a proposed marketing campaign, it expects that sales would increase by 15%. Should ALPHA approve the proposed marketing campaign (YES or NO)
$25
Therefore, Break even = 40000/25 1600 Units Sales (3600*100*115%) 414000
Less : Variable costs (3600*75) -270000
Operating leverage = Contribution / Net operating income (or) EBIT Contribution Margin 144000
Less : Fixed costs -40000
Net operating income : Less : Market campaign -18000
Sales (3600*100) 360000 Net operating income 86000
Less : Variable costs (3600*75) -270000
Contribution Margin 90000 Yes, since there is increase in net operating income by 36000 (86000-50000)
Less : Fixed costs -40000
Net operating income 50000 If ALPHA drops the unit price to $90, variable costs increase to $80, and fixed costs are reduced by $10,000, how many units will ALPHA need to sell to break even?
Operating leverage 1.8 Times
Sales (3600*90) 324000
Less : Variable costs (3600*80) -288000
Contribution Margin 36000
Less : Fixed costs -30000
Net operating income 6000
Break even Formula (Units) = Fixed costs / Contribution per unit
30000/10
3000 units

ekkarill92 answered 2 years ago
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