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Exercise 5-14 Break-Even and Target Profit Analysis [LO5-3, LO5-4, LO5-5, LO5-6] Lindon Company is the exclusive...

Exercise 5-14 Break-Even and Target Profit Analysis [LO5-3, LO5-4, LO5-5, LO5-6]

Lindon Company is the exclusive distributor for an automotive product that sells for $18.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $92,340 per year. The company plans to sell 13,200 units this year.

Required:

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

2.	Use the equation method:

a.	What is the break-even point in unit sales and in dollar sales?

b.	What amount of unit sales and dollar sales is required to earn an annual profit of $27,000?

c.	Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $1.80 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

3.	Repeat (2) above using the formula method.

a.	What is the break-even point in unit sales and in dollar sales?

b.	What amount of unit sales and dollar sales is required to earn an annual profit of $27,000?

c.	Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $1.80 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Solutions

Expert Solution

1)Variable expense per unit =selling price [1-CM ratio]

18[1-.30]

$ 12.60 per unit

a)Number of units *price =[Variable cost *units ]+ fixed cost

X*18 = 12.6*X + 92340

18X -12.6X = 92340

5.4X =92340

X = 92340 /5.4

= 17100 UNITS

Dollar sales = 17100* 18 =$ 307800

b)Number of units *price =[Variable cost *units ]- fixed cost + Target profit

x* 16 = 12.6*x + 92340 +27000

18x -12.6x = 119340

5.4x = 119340

x= 119340/5.4

=22100 units

Dollar sales = 22100*18 =$397800

c)new variable expense = 12.6- 1.8 = 10.80

18x = 10.8x +92340

18x -10.8x =92340

7.2x = 92340

x = 92340 /7.2 = 12825 units

dollar sales = 12825*18 =$ 230850

3a)BEP =fixed cost /contribution per unit

92340 /(18-12.6)

92340 / 5.4

17100 units

BEP ($)= fixed cost /CM ratio

92340 /.30

=$ 307800

BEP(unit) = [fixed cost+target profit ]/contribution per unit

=[92340+27000]/5.4

= 22100units

BEP($)= [92340+27000]/.30

= $ 397800

c)Contribution per unit = 18-10.8=7.2

CM ratio - 7.2 /18 = .40 or 40%

BEP (unit)= 92340 /7.2

= 12825 units

BEP($) = 92340/.40

= $ 230850

ekkarill92 answered 1 year ago

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