Question

Super Sales Company is the exclusive distributor for a high-quality knapsack. The product sells for $100 per unit and has a CM ratio of 35%. The company’s fixed expenses are $420,000 per year. The company plans to sell 14,000 knapsacks this year.

Required:

1. What are the variable expenses per unit?

2. Use the equation method for the following:

a. What is the break-even point in units and in sales dollars?

b. What sales level in units and in sales dollars is required to earn an annual profit of $105,000?

c. What sales level in units is required to earn an annual after-tax profit of $105,000 if the tax rate is 20%?

d. Assume that through negotiation with the manufacturer, Super Sales Company is able to reduce its variable expenses by $5 per unit. What is the company’s new break-even point in units and in sales dollars? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

3. Use the formula method for the following:

a. What is the break-even point in units and in sales dollars?

b. What sales level in units and in sales dollars is required to earn an annual profit of $105,000?

c. What sales level in units is required to earn an annual after-tax profit of $105,000 if the tax rate is 20%?

d. Assume that through negotiation with the manufacturer, Super Sales Company is able to reduce its variable expenses by $5 per unit. What is the company’s new break-even point in units and in sales dollars? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

Answer 1

1	Variable expenses per unit =Sales per unit(1-Contribution margin ratio)
	Variable expenses per unit =$100*(1-0.35) =$65
2.a	Break even point in sales units =Fixed Cost / (Selling price per unit - Variable cost per unit)
	Break even point in sales units =$420,000 / ($100 - $65)
	Break even point in sales units =$420,000 / $35 =12,000 units
	Break even point in Dollars =Break even point in sales units*Selling price per unit
	Break even point in Dollars =12,000 units*$100 =$1,200,000
	Required annual profit before tax =$105,000
	Required contribution margin =Required annual profit+Fixed costs
	Required contribution margin =$105,000 + $420,000 =$525,000
	Required sales =Required contribution margin / contribution margin ratio
	Required sales =$525,000 / 35% =$1,500,000
	Required sales in units =$1,500,000 / $100 =15,000 units
2.c	Required annual profit before tax =$105,000*100/80 =$131,250
	Required contribution margin =Required annual profit+Fixed costs
	Required contribution margin =$131,250 + $420,000 =$551,250
	Required sales =Required contribution margin / contribution margin ratio
	Required sales =$551,250 / 35% =$1,575,000
	Required sales in units =$1,575,000 / $100 =15,750 units
2.d	Revised variable expenses =$60
	Revised contribution margin per unit =$100-$60 =$40
	Break even point in sales units =$420,000 / ($100 - $60)
	Break even point in sales units =$420,000 / $40 =10,500 units
	Break even point in $ =10,500 units*$100 =$1,050,000
3.a	Sales per unit	$100
	Less:Variable cost per unit	$65
	Contribution margin per unit	$35
	Annual fixed cost	$4,20,000
	Contribution margin ratio	35%
	Breakeven sales in units	12000	units
	Breakeven sales in $	$12,00,000
3.b	Required Income	$1,05,000
	Add:Fixed cost	$4,20,000
	Required Contribution(a)	$5,25,000
	Contribution margin per unit(b)	$35.00
	Required sales(a/b)	15000	units
3.c	Required Income(Before tax)	$1,31,250
	Add:Fixed cost	$4,20,000
	Required Contribution(a)	$5,51,250
	Contribution margin per unit(b)	$35.00
	Required sales(a/b)	15750	units
3.d	Sales per unit	$100
	Less:Variable cost per unit	$60
	Contribution margin per unit	$40
	Annual fixed cost	$4,20,000
	Contribution margin ratio	40%
	Breakeven sales in units	10500	units
	Breakeven sales in $	$10,50,000