Question

Lindon Company is the exclusive distributor for an automotive product that sells for $42.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $275,940 per year. The company plans to sell 6,800 units this year.

Required:

1.		What are the variable expenses per unit? (Round your answer to 2 decimal places.)
		Variable expenses per unit 2. Use the equation method:

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

b.	What amount of unit sales and dollar sales is required to earn an annual profit of $63,000?
	Sales level in units

Sales level in dollars

c.	Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.20 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
	New break-even point in unit sales

New break-even point 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?
	Break-even point in unit sales Break-even point in dollar sales

	b. What amount of unit sales and dollar sales is required to earn an annual profit of $63,000?
	Sales level in units

Sales level in dollars

c.	Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.20 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
	New break-even point in unit sales New break-even point in dollar sales

Answer 1

• All working forms part of the answer
• Formula method and Equation methods are done simultaneously.
• Answer 1

A	Sale Price per unit	$                    42.00
B	CM Ratio	30%
C=A x B	Unit Contribution	$                    12.60
D=A-C	Unit Variable cost [Answer 1]	$                    29.40

• Answer 2 & 3

A	Fixed Cost	$        2,75,940.00
B	Unit Contribution	$                    12.60
C=A/B	Break Even point in Unit Sales [Answer 2(a)]	$           21,900.00
D	CM Ratio	30%
E=A/D	Break even point in dollar sales [Answer 2(a)]	$        9,19,800.00

A	Fixed Cost	$        2,75,940.00
B	Expected annual profits	$           63,000.00
C=A+B	Total contribution required	$        3,38,940.00
D	Unit contribution	$                    12.60
E=C/D	No. of units to earn target profit [Answer 2&3 (b)]	26900
F=E x $42 per unit	Amount of Sale dollars [Answer 2&3 (b)]	$     11,29,800.00

A	Sale Price per unit	$                    42.00
B = $29.4 - 4.2	New variable cost per unit	$                    25.20
C =A-B	New contribution margin	$                    16.80
D=C/A	New CM ratio	40%
E	Fixed Cost	$        2,75,940.00
F=E/C	Break Even point in Unit Sales [Answer 2(c)]	16425
G=E/D	Break even point in dollar sales [Answer 2(c)]	$        6,89,850.00