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 $264,600 per year. The company plans to sell 24,400 units this year.

Required:

1. What are the variable expenses per unit?

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

3. What amount of unit sales and dollar sales is required to attain a target profit of $138,600 per year?

4. 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?

Answer 1

1. Variable Expense Ratio= 1- CM Ratio

= 1-30%

= 70%

Hence Variable Expense = 70 % * Sales Price Per Unit

= 70 % * $ 42

= $ 29.40

Hence the correct answer is $ 29.40

2.

Break Even Point (Dollars)= Fixed Cost / Contribution Margin Ratio

= $ 264,600 / 30%

= $ 882,000

Break Even Point (units)= Fixed Cost / Contribution Margin

= Fixed Cost / ( Sales * 0.3)

= $ 264,600 / ( $ 42 *0.3)

= 21,000 Units

3.

Required Contribution = Target Profit + Fixed Cost

= $ 138,600 + $ 264,600

= $ 403,200

Sales Unit Required = Required Contribution / Contribution Margin Per Unit

= $ 403,200 / ( $ 42*0.3)

= 32,000 Units

Sales Dollar Required = Required Contribution / Contribution Margin Ratio

= $ 403,200 / 0.3

= $ 1,344,000

4.

Sales Price = $ 42

Less: Variable Cost ( $ 29.40- $ 4.20) = 25.20

Contribution Margin = $ 16.80

Contribution Margin Ratio = Contribution Margin / Sales *100

= $ 16.80 /$ 42 *100

= 40%

Break Even Point (Dollars)= Fixed Cost / Contribution Margin Ratio

= $ 264,600 / 40%

= $ 661,500

Break Even Point (units)= Fixed Cost / Contribution Margin

= $ 264,600 / ( $ 16.80)

=  15,750 Units