Last year, Alpha Company sold 3,600 units of a single product at a price of $100...

Last year, Alpha Company sold 3,600 units of a single product at a price of $100 per unit. The company variable cost per unit was $75, its fixed cost for the year were $40,000.

A. How many units must ALPHA sell to break even?

B. What is ALPHA’s operating leverage? How much will ALPHA need to sell in sales dollars to earn a target profit of $80,000?

C. If ALPHA spends $18,000 and a proposed marketing campaign, it expects that sales would increase by 15%.

D. Should ALPHA approve the proposed marketing campaign (YES or NO) Why or Why not?

E. If ALPHA drops the unit price to $90, variable costs increase to $80, and fixed costs are reduced by $10,000, how many units will ALPHA need to sell to break even?

Solutions

Expert Solution

Answer Break even = 1600 Units

Calculated as

Brake even units = Fixed expense/Contribution = $40000/25 = 1600 units

Answer B. Operating leverage = 1.80 and Units to earn target profit of $80000 = 4800 units

	Total	Per Unit
Sale	$ 360,000	$ 100
Less: Variable cost	$ 270,000	$ 75
Contribution	$ 90,000	$ 25
Less: Fixed Cost	$ 40,000
Net operating income	$ 50,000


Operating leverage	Contribution	=	90000	=	1.8
Operating leverage	Net income	=	50000	=	1.8

Number of Units to earn target profit	=Fixed cost + Target profit/Contribution per pizza
	=(40000+80000)/$25
	4800

Answer C and D : NO proposal generates extra loss of $4500 so should not be accepted

Calculated as

Additional sale = 15% of 3600 units = 540 units

additional contribution = 540 x 25 = $13500

Additional expense = $18000

Extra loss from Proposal = $18000-13500 = $4500 loss

Answer E :New break even point = 3000 Units

as New selling price = 90

new variable cost = 80

New contribution = $10

Fixed cost = 40000-10000 = 30000

New break even point = 30000/10 = 3000 units

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ekkarill92 answered 11 months ago

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