Question

Lindon Company is the exclusive distributor for an automotive product that sells for $30.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $162,000 per year. The company plans to sell 20,200 units this year.

Required:

1. What are the variable expenses per unit?

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 $72,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.00 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Answer 1

• All working forms part of the answer
• Requirement 1 and 2

A	Unit Sales Price	$                                     30.00
B	CM ratio	30%
C=A x B	Unit Contribution margin	$                                        9.00
D = A - C	Variable expenses per unit [Answer 1]	$                                     21.00
E	Fixed expenses	$                           162,000.00
F = E/C	Break Even point in units [Answer 2]	18000
G = E/B	Break Even point in dollar sales [Answer 2]	$                           540,000.00

• Requirement 3

A	Target Profit	$                             72,000.00
B	Fixed expenses	$                           162,000.00
C=A+B	Total contribution required	$                           234,000.00
D	Unit Contribution margin	$                                        9.00
E=C/D	Unit Sales needed to attain target profit [Answer 3]	26000
F	CM ratio	30%
G = C/F	Dollar Sales needed to attain Target profits [Answer 3]	$                           780,000.00

• Requirement 4

A	Current Unit contribution margin	$                                        9.00
B	Reduction in Variable expenses	$                                        3.00
C=A+B	New unit contribution margin	$                                     12.00
D=C/$30	New CM ratio	40%
E	Fixed expenses	$                           162,000.00
F = E/C	New Break Even point in Unit Sales [Answer 4]	13500
G = E/D	New Break Even point in Dollar sales [Answer 4]	$                           405,000.00