Question

Lindon Company is the exclusive distributor for an automotive product that sells for $30.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $162,000 per year. The company plans to sell 20,200 units this year. Required:

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

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 $72,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.00 per unit. What is the company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $72,000?

Answer 1

Answer 1.

Contribution margin per unit = Selling price per unit * Contribution margin ratio
Contribution margin per unit = $30 * 30%
Contribution margin per unit = $9

Contribution margin per unit = Selling price per unit - Variable expenses per unit
$9 = $30 - Variable expenses per unit
Variable expenses per unit = $21

Answer 2.

Breakeven point in unit sales = Fixed expenses / Contribution margin per unit
Breakeven point in unit sales = $162,000 / $9
Breakeven point in unit sales = 18,000

Breakeven point in dollar sales = Fixed expenses / Contribution margin ratio
Breakeven point in dollar sales = $162,000 / 0.30
Breakeven point in dollar sales = $540,000

Answer 3.

Target unit sales = (Fixed expenses + Target profit) / Contribution margin per unit
Target unit sales = ($162,000 + $72,000) / $9
Target unit sales = 26,000

Target dollar sales = (Fixed expenses + Target profit) / Contribution margin ratio
Target dollar sales = ($162,000 + $72,000) / 0.30
Target dollar sales = $780,000

Answer 4.

Variable expenses per unit = $21 - $3
Variable expenses per unit = $18

Contribution margin per unit = Selling price per unit - Variable expenses per unit
Contribution margin per unit = $30 - $18
Contribution margin per unit = $12

Contribution margin ratio = Contribution margin per unit / Selling price per unit
Contribution margin ratio = $12 / $30
Contribution margin ratio = 0.40

Breakeven point in unit sales = Fixed expenses / Contribution margin per unit
Breakeven point in unit sales = $162,000 / $12
Breakeven point in unit sales = 13,500

Breakeven point in dollar sales = Fixed expenses / Contribution margin ratio
Breakeven point in dollar sales = $162,000 / 0.40
Breakeven point in dollar sales = $405,000

Target unit sales = (Fixed expenses + Target profit) / Contribution margin per unit
Target unit sales = ($162,000 + $72,000) / $12
Target unit sales = 19,500

Target dollar sales = (Fixed expenses + Target profit) / Contribution margin ratio
Target dollar sales = ($162,000 + $72,000) / 0.40
Target dollar sales = $585,000