Question

Lindon Company is the exclusive distributor for an automotive product that sells for $45.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $229,500 per year. The company plans to sell 18,000 units this year.

Required:

1.		What are the variable expenses per unit? (Round your answer to 2 decimal places.)

      

2.	Use the equation method:

a.	What is the break-even point in unit sales and in dollar sales? (Do not round intermediate calculations.)

             

b.	What amount of unit sales and dollar sales is required to earn an annual profit of $67,500? (Do not round intermediate calculations.)

            

c.	Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.90 per unit. What is the company’s new break-even point in unit sales and in dollar sales? (Do not round intermediate calculations. Round up break even point answers to the nearest whole number.)

           

3.	Repeat (2) above using the formula method.

a.	What is the break-even point in unit sales and in dollar sales? (Do not round intermediate calculations.)

          

b.	What amount of unit sales and dollar sales is required to earn an annual profit of $67,500? (Do not round intermediate calculations.)

         

c.	Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.90 per unit. What is the company’s new break-even point in unit sales and in dollar sales? (Do not round intermediate calculations. Round up break even point answers to the neare

Answer 1

• All working forms part of the answer
• Requirement 1

A	Sale price per unit	$                                           45.00
B	CM Ratio	30%
C = A x B	Contribution margin per unit	$                                           13.50
D = A - C	Variable expenses per unit	$                                           31.50

• Requirement 2

---Part ‘a’

Let Break EVEN units be ‘x’, then, at Break Even point

$13.50x - $ 229,500 = $ 0

13.5x = 0 + 229500
x = 229500/13.5
x= 17,000 units = Break Even point in units.

Let Break Even sales Revenue be $ x, then at Break Even point:
$x * 30% - $ 229500 = $ 0
0.30x – 229500 = 0
0.30x = 229500

X=229500/0.30
x =$ 765,000 = Break Even point in dollar sales

---Part ‘b’

Let the unit sold required to earn that profit be ‘x’ units, then:

13.5x – 229500 = 67500
13.5x = 229500 + 67500
x = 297000/13.5
x = 22,000 = Units required to earn target profits

Dollar sales required = no. of units x $ 45 = 22000 x 45 = $ 990,000

---Part ‘c’

New Contribution margin per unit = 13.5 + 4.9 = $ 18.40

Let Break EVEN units be ‘x’, then, at Break Even point

$18.40x - $ 229,500 = $ 0

18.40x = 0 + 229500
x = 229500/18.4
x= 12473 units = Break Even point in units.

Break Even in sales dollar = Break even units x Sales price per unit

12473 x $ 45 = $ 561,277

• Requirement 3

--Part ‘a’

Break Even in units = Fixed cost/Contribution margin per unit = 229500/13.5 = 17,000 units

Break even in dollar sales = Fixed cost/CM ratio = 229500/30% = $ 765,000

---Part ‘b’

No. of units required = (Fixed cost + Target profit)/Contribution margin per unit = (229500 + 67500)/13.5 = 22,000 units

Amount of dollar sales required = (Fixed cost + Target profits) /CM ratio = (229500 + 67500) / 30% = $990,000

---Part ‘c’

New Contribution margin per unit = 18.40
New CM ratio will be 18.4/45 = 40.88888%

Break Even in units = Fixed cost/Contribution margin per unit = 229500/18.4 = 12473 units

Break even in dollar sales = Fixed cost/CM ratio = 229500/40.8888% = $ 561,277