Question

Super Sales Company is the exclusive distributor for a high-quality knapsack. The product sells for $120 per unit and has a CM ratio of 25%. The company’s fixed expenses are $405,000 per year. The company plans to sell 14,000 knapsacks this year.

1. What are the variable expenses per unit?

2. Use the equation method for the following:

a. What is the break-even point in units and in sales dollars?

b. What sales level in units and in sales dollars is required to earn an annual profit of $117,000?

c. What sales level in units is required to earn an annual after-tax profit of $117,000 if the tax rate is 25%?

d. Assume that through negotiation with the manufacturer, Super Sales Company is able to reduce its variable expenses by $6 per unit. What is the company’s new break-even point in units and in sales dollars? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

3. Use the formula method for the following:

a. What is the break-even point in units and in sales dollars?

b. What sales level in units and in sales dollars is required to earn an annual profit of $117,000?

c. What sales level in units is required to earn an annual after-tax profit of $117,000 if the tax rate is 25%?

d. Assume that through negotiation with the manufacturer, Super Sales Company is able to reduce its variable expenses by $6 per unit. What is the company’s new break-even point in units and in sales dollars? (Do not round intermediate calculations. Round your final answers to the nearest whole number.

Answer 1

1.	Variable expenses per unit =Sales per unit(1-Contribution margin ratio)
	Variable expenses per unit =$120*(1-0.25) =$90
2.a	Break even point in sales units - Profit = [sales - VC] * UNITS - Fixed exp
	0 = [120-90]*units - 405000
	Break even point in sales units =$405,000 / $30 =13500 units
	Break even point in Dollars =13500 units*$120 =$1,620,000
2b	Required annual profit before tax =$117,000
	Profit = [sales - VC] * UNITS - Fixed exp
	117000 = [120-90] * units - 405000
	522000 = 30units
	Required sales in units =$522,000 / $30 =17400 units
	Required sales in dollars = 17400 * 120 = 2,088,000
2.c	Required annual profit before tax =$117,000*100/75 = 156000
	Profit = [sales - VC] * UNITS - Fixed exp
	156000 = [120-90] * units - 405000
	Required sales in units =$561,000 / $30 =18700 units
	Required sales in dollars = 18700 * 120 = 2,244,000
3.d	Revised variable expenses =$90 - 6 = 84
	Revised contribution margin per unit =$120 - $84 =$36
	Break even point in sales units =$405,000 / ($120 - $84) = 11250 units
	Break even point in $ =11250 units*$120 =$1,350,000

	Variable expenses per unit =$120*(1-0.25) =$90
3.a	Break even point in sales units =Fixed Cost / (Selling price per unit - Variable cost per unit)
	Break even point in sales units =$405,000 / ($120 - $90)
	Break even point in sales units =$405,000 / $30 =13500 units
	Break even point in Dollars =Break even point in sales units*Selling price per unit
	Break even point in Dollars =13500 units*$120 =$1,620,000
3b	Required annual profit before tax =$117,000
	Required contribution margin =Required annual profit+Fixed costs
	Required contribution margin =$117,000 + $405,000 =$522,000
	Required sales =Required contribution margin / contribution margin ratio
	Required sales in dollars =$522,000 / 25% =$2,088,000
	Required sales in units =$2,088,000 / $120 =17400 units
3.c	Required annual profit before tax =$117,000*100/75 = 156000
	Required contribution margin =Required annual profit+Fixed costs
	Required contribution margin =$156000 + $405,000 =$561000
	Required sales =Required contribution margin / contribution margin ratio
	Required sales in dollars =$561000 / 25% =$2,244,000
	Required sales in units =$2,244,000 / $120 =18700 units
3.d	Revised variable expenses =$90 - 6 = 84
	Revised contribution margin per unit =$120 - $84 =$36
	Break even point in sales units =$405,000 / ($120 - $84) = 11250 units
	Break even point in $ =11250 units*$120 =$1,350,000