In: Accounting
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.) |
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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.) |
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