Question

Lindon Company is the exclusive distributor for an automotive product that sells for $48.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $324,000 per year. The company plans to sell 26,500 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 $180,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.80 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 $180,000?

Answer 1

1) Variable cost per unit:
Variable cost to sales ratio (100% - 30%) (a)	70%
Selling price per unit (b)	$48
Variable cost per unit (a*b)	$33.60
2) Break-even point in unit sales:
Fixed cost (a)	$324,000
Contribution margin per unit ($48 - $33.60) (b)	$14.40
Break-even point in unit sales (a/b)	22,500
Break-even point in sales dollars:
Fixed cost (a)	$324,000
Contribution margin ratio ($14.40/$48*100) (b)	30%
Break-even point in sales dollars (a/b)	$1,080,000
3)
Fixed cost (a)	$324,000
Target profit (b)	$180,000
Contribution margin per unit (c )	$14.40
Unit sales required to attain a target profit of $180,000 (a+b)/c	35,000
Fixed cost (a)	$324,000
Target profit (b)	$180,000
Contribution margin per unit (c )	30%
Sales dollars required to attain a target profit of $180,000 (a+b)/c	$1,680,000
4)
Fixed cost (a)	$324,000
Contribution margin per unit ($33.60 - $4.80 = $28.80); ($48 - $28.80) (b)	$19.20
Break-even point in unit sales (a/b)	16,875
Break-even point in sales dollars:
Fixed cost (a)	$324,000
Contribution margin ratio ($19.20/$48*100) (b)	40%
Break-even point in sales dollars (a/b)	$810,000
Fixed cost (a)	$324,000
Target profit (b)	$180,000
Contribution margin per unit (c )	40%
Sales dollars required to attain a target profit of $180,000 (a+b)/c	$1,260,000

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