Question

Lindon Company is the exclusive distributor for an automotive product that sells for $40.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $246,000 per year. The company plans to sell 23,700 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 $126,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.00 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

	1. Variable expense per unit 2. Break-even point in units Break-even point in dollar sales 3. Unit sales needed to attain target profit Dollar sales needed to attain target profit 4. New break-even point in unit sales New break-even point in dollar sales Doller sales needed to attain target profit

Answer 1

The following are the required calculations:

1.variable expense per unit (selling price * (1- CM ratio)=>$40 * (1-0.30)	$28.00
2.break even point in units = fixed expenses / (Price *CM ratio) => $246,000 / ($40.00*30%) =>$246,000 / $12	20,500 units
.break even point in dollar sales = fixed expenses / CM ratio =>$246,000/0.30	$820,000
3.Unit sales needed to attain target profit (fixed cost + target profit) / (price*CM ratio) =>($246,000 + $126,000) / $12	31,000 units
dollar sales needed to attain target profit (fixed cost + target profit) / CM ratio=>(246,000+126,000) / 0.30	$1,240,000
4.new break even point in unit sales=> fixed ccost /new contribution (see note)=>$246,000 / $16	15,375 units
new break even point in dollar sales => fixed cost / CM ratio => $246,000 / 0.40	$615,000
dollar sales for target profit => ($246,000+126,000) / 0.40	$930,000

note:

new variable cost per unit = $28 - $4 =>$24.

new contribution = $40 -24 =>$16.

new CM ratio = $16/$40 =>0.40.