Question

Perez Company makes and sells products with variable costs of $57 each. Perez incurs annual fixed costs of $30,000. The current sales price is $72.

The following requirements are interdependent. For example, the $6,000 desired profit introduced in Requirement c also applies to subsequent requirements. Likewise, the $67 sales price introduced in Requirement d applies to the subsequent requirements.

a. Determine the contribution margin per unit

b. Determine the break-even point in units and in dollars. Prepare an income statement using the contribution margin format.

c. Suppose that Perez desires to earn a $6,000 profit. Determine the sales volume in units and dollars required to earn the desired profit. Prepare an income statement using the contribution margin format.

d. If the sales price drops to $67 per unit, what level of sales is required to earn the desired profit? Express your answer in units and dollars. Prepare an income statement using the contribution margin format.

 

Answer 1

Answer 1

Selling Price	$ 72
Less: variable Cost per unit	$ 57
Contribution per unit	$ 15

Answer 2

Break even Point (in units) = Fixed Cost / Contribution per unit

= $ 30,000/15

= 2,000 units

Break even Point (in $) = Break even Point (in units) * Selling Price

= 2,000 units * $ 72

= $ 144,000

Income statement
Sales	$ 144,000
Less: variable Cost	$ 114,000
Contribution	$   30,000
Less: Fixed Cost	$   30,000
Net Income	$            -

Answer c

Sales for desired profit (in units) = (Fixed Cost + Desired profit) / Contribution per unit

=(30000+6000)/15

= 2,400 units

Sales for desired profit (in $) = Sales for desired profit (in units) * Selling Price

= 2400 units * $ 72

= $ 172,800

Income statement
Sales	$ 172,800
Less: variable Cost	$ 136,800
Contribution	$   36,000
Less: Fixed Cost	$   30,000
Net Income	$      6,000

Answer d

Selling Price	$ 67
Less: variable Cost per unit	$ 57
Contribution per unit	$ 10

Sales for desired profit (in units) = (Fixed Cost + Desired profit) / Contribution per unit

=(30000+6000)/10

= 3,600 units

Sales for desired profit (in $) = Sales for desired profit (in units) * Selling Price

= 3600 units * $ 67

= $241200

Income statement
Sales	$ 241,200
Less: variable Cost	$ 205,200
Contribution	$   36,000
Less: Fixed Cost	$   30,000
Net Income	$      6,000