Question

In: Accounting

Lindon Company is the exclusive distributor for an automotive product that sells for $32.00 per unit...

Lindon Company is the exclusive distributor for an automotive product that sells for $32.00 per unit and has a CM ratio of 40%. The company’s fixed expenses are $320,000 per year. The company plans to sell 26,000 units this year.


Required:

1.

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

     


2a.

What is the break-even point in unit sales and in dollar sales? (Do not round intermediate calculations.)

     


2b.

What amount of unit sales and dollar sales is required to earn an annual profit of $64,000? (Do not round intermediate calculations.)

      


2c.

Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.40 per unit. What is the company’s new break-even point in unit sales and in dollar sales? (Do not round intermediate calculations. Round up break even point answers to the nearest whole number.)

      

Solutions

Expert Solution

Solution: (1.) CM Ratio = contribution ÷ sales

   40% = contribution ÷ (26,000 x $32)

  contribution = $832,000 x 40%

  contribution = $332,800

Sales - variable cost = $332,800 ( since, contribution = sales - variable cost )

$832,000 - variable cost = $332,800

variable cost = $499,200

Hence, variable cost per unit = variable cost ÷ units = $499,200 ÷ 26,000 = $19.20 per unit

(2a.) Break even point in units = Fixed cost ÷ ( sale price p.u. - variable cost p.u.)

   = $320,000 ÷ ( $32 - $19.20 )

= 25,000 units

  Break even point in dollers = break even units x sale price per unit

   = 25,000 x $32

= $800,000

(2b) Let, no. of units required to earn profit of $64,000 be n

Total sale - (fixed expense + variable cost) = Profit

   $32 x n - ($320,000 + $19.20 x n) = $64,000

$32n - $320,000 - $19.20n = $64,000

$12.8n - $320,000 = $64,000

$12.8n = $384,000

n = 30,000 units

In doller sales = 30,000 x $32 = $960,000

(2c) new variable cost p.u. = $19.20 - $4.40 = $14.80 per unit

Break even point in units = Fixed cost ÷ ( sale price p.u. - variable cost p.u.)

   = $320,000 ÷ ( $32 - $14.80 )

=$320,000 ÷ $17.20

= 18,605 units

Break even point in dollers = break even units x sale price per unit

   = 18,605 x $32

= $595,360

  


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