Question

Lindon Company is the exclusive distributor for an automotive product that sells for $28.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $147,000 per year. The company plans to sell 19,500 units this year.

Required:

1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.)

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

3. What amount of unit sales and dollar sales is required to attain a target profit of $63,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.80 per unit. What is the company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $63,000?

Answer 1

1. Calculation of Variable Cost Per Unit :

Sales = 19,500 Units * $28 = $546,000

CM Ratio = 30%

Variable Cost Ratio = 1-30% = 70%

Variable Cost = $546,000 * 70% = $382,200

Variable Cost Per Unit = $382,200 / 19,500 Units = $19.60

2. Break Even Point in Unit Sales and Dollar Sales :

Break Even Point (Unit Sales) = Fixed Cost / Contribution Per Unit

Contribution P.U. = Sales Price - Variable Cost Per Unit

= $28 - $19.60 = $8.40

Break Even Point (Unit Sales) = $147,000 / $8.40 = 17,500 Units

Break Even Point (Dollar Sales) = Break Even Point in Units * Sales Price

= 17,500 Units * $28 = $490,000

3. Target Profit = $63,000 then Unit Sales and Dollar Sales :

Sales (Units) = (Fixed Cost + Target Profit) / Contribution Per Unit

= (147,000 + 63,000) / 8.40 = 25,000 Units

Sales (Dollar) = 25,000 Units * $28 = $700,000

4. After Using More Efficient Shipper Variable Expenses Reduced by $2.80 P.U. :

New Variable Cost = $19.60 - $2.80 = $16.80

New Contribution Per Unit = $28 - $16.80 = $11.20

New Break Even Point (Unit Sales) = Fixed Cost / New Contribution Per Unit

= $147,000 / $11.20 = 13,125 Units

New Break Even Point (Dollar Sales) = 13,125 Units * $28 = $367,500

Sales to attain Target Profit = [(Fixed Cost + Target Profit) / New Contribution Per Unit] * Sale Price

= [(147,000 + 63,000) / $11.20] * $28

=18,750 * $28 = $525,000