In: Accounting
Lindon Company is the exclusive distributor for an automotive product that sells for $56.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $411,600 per year. The company plans to sell 29,300 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 $243,600 per year?
4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $5.60 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
Answer 1.
Selling Price = $56.00
CM Ratio = 30%
Contribution Margin per unit = Selling Price * CM Ratio
Contribution Margin per unit = $56.00 * 30%
Contribution Margin per unit = $16.80
Contribution Margin per unit = Selling Price - Variable Expenses
per unit
$16.80 = $56.00 - Variable Expenses per unit
Variable Expenses per unit = $39.20
Answer 2.
Breakeven Point in unit sales = Fixed Expenses / Contribution
Margin per unit
Breakeven Point in unit sales = $411,600 / $16.80
Breakeven Point in unit sales = 24,500
Breakeven Point in dollar sales = Fixed Expenses / CM
Ratio
Breakeven Point in dollar sales = $411,600 / 0.30
Breakeven Point in dollar sales = $1,372,000
Answer 3.
Target Profit = $243,600
Required Sales in unit sales = (Fixed Expenses + Target Profit)
/ Contribution Margin per unit
Required Sales in unit sales = ($411,600 + $243,600) / $16.80
Required Sales in unit sales = 39,000
Required Sales in dollar sales = (Fixed Expenses + Target
Profit) / CM Ratio
Required Sales in dollar sales = ($411,600 + $243,600) / 0.30
Required Sales in dollar sales = $2,184,000
Answer 4.
Selling Price = $56.00
Variable Expenses per unit = $39.20 - $5.60
Variable Expenses per unit = $33.60
Contribution Margin per unit = Selling Price - Variable Expenses
per unit
Contribution Margin per unit = $56.00 - $33.60
Contribution Margin per unit = $22.40
CM Ratio = Contribution Margin per unit / Selling Price
CM Ratio = $22.40 / $56.00
CM Ratio = 0.40
Breakeven Point in unit sales = Fixed Expenses / Contribution
Margin per unit
Breakeven Point in unit sales = $411,600 / $22.40
Breakeven Point in unit sales = 18,375
Breakeven Point in dollar sales = Fixed Expenses / CM
Ratio
Breakeven Point in dollar sales = $411,600 / 0.40
Breakeven Point in dollar sales = $1,029,000