Question

Super Sales Company is the exclusive distributor for a revolutionary bookbag. The product sells for $60 per unit and has a CM ratio of 40%. The company's fixedexpenses are $360,000 per year. The company plans to sell 17,000 bookbags this year.

1. What are the variable expenses per unit?
2. Using the equation method:
a. What is the break-even point in units and in sales dollars?
b. What sales level in units and in sales dollars is required to earn an annual profit of $90,000?
c. Assume that through negotiation with the manufacturer the Super Sales Company is able to reduce its variable expenses by $3 per unit. What is the company's newbreak-even point in units and in sales dollars?
3. Repeat (2) above using the formula method.

Answer 1

1.) $36
CM ratio = 40% so 40% * 60 = $24 profit, or $36 variable cost

2.)
a.) 360,000 = $24x
x= 15,000 units
b.) 15,000 * 60 = $900,000 Sales
c.)
360,000 = $27x
x = 13,333.33 units
x * 60 = $800,000 Sales

Answer 2

1.

Calculate the contribution margin per unit:

The contribution margin is the difference between the selling price and variable expense per unit of the product. To compute the variable expenses per unit the contribution per unit will be calculated as under:

Calculate the variable expense per unit:

The contribution per unit is $24 which is the difference between the selling price per unit and variable expense per unit. Therefore the variable expense per unit is calculated as under:

To solve the equation $60 is subtracted to both the sides of the equation.

The variable expense per unit of the company is $36.

2(a)

Calculate the sales units:

The equation for the calculation of break-even point in unit sales is as under:

To solve the equation and know the unknown figure sales units we divide $24 to both the sides of equation.

The break-even point of unit sales of the company is 15,000units. It means if the company sells the 15,000 units it will have no profit no loss. If the company sells the units more than 15,000 units it will have profit and if it sells less than this point of sales then the company will have loss.

Calculate the break even sales dollars:

The company’s break-even sale in dollars using the equation is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 40%.

The break even sale in dollars using equation method is calculated as under:

To know the amount of sales in dollars we are dividing 0.40 to both the sides of the equation:

The company’s break-even sale in dollars is $900,000.

b)

Calculate the number of units to be sold:

Target profit means to earn the specified amount of profit the company has to sell particular amount of sales volume which calculated with the following formula:

To earn a target profit of $90,000 the company has to sell the following number of units of its product which is calculated by the following formula:

The contribution margin per unit with the selling price of $60 per unit is $24.

To solve the equation $360,000 is added to both the sides of equation.

To solve the equation and know the unknown figure of sales units $24 is divided to both the sides of equations.

Therefore, to earn the profit of $90,000 the company has to sell 18,750 units.

Calculate the sales in dollars:

The contribution margin ratio is with the new selling price of $60 per unit is $24.

To solve the equation $360,000 is added to both the sides of equation.

To solve the equation and know the unknown figure of sale in dollars 0.40 is divided to both the sides of equations.

Therefore, to earn the profit of $90,000 the company should have sale in dollars of $1,125,000.

c)

Calculate the variable cost:

If due to negotiation the company can be able to reduce its variable cost per unit by $3 then its variable cost per unit for the product would be $33.

Calculate the contribution per unit:

The contribution per unit of the product is calculated as under:

The contribution per unit after reduction of variable cost per unit by $3 is $27.

Calculate the break-even point:

The break-even point in units is calculated as under:

The contribution margin per unit of the product is $27 and the fixed expense is $360,000.

To solve the equation $360,000 is added to both the sides of equation.

To solve the equation and know the unknown figure of sales units $27 is divided to both the sides of equations.

Therefore, the new break-even point of sale units is 13,334 units.

Calculate the break-even sales in dollars:

The company’s break-even sale in dollars using the equation is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 45%.

The break even sale in dollars in equation method, to solve the equation $360,000 is added to both the sides of equation is calculated as under:

To solve the equation and know the unknown figure of sale in dollars 0.45 is divided to both the sides of equation.

If the variable cost per unit is reduced to $33 then the company’s break-even sale in dollars would be $800,000

3 (a)

Calculate the break-even sales in units:

The company’s break-even point in unit sales using the formula method is calculated by dividing the fixed expenses with contribution margin per unit. The contribution margin per unit of the product is $24 and the fixed expense is $360,000.

The break-even sale in units of the company is 15,000units.

The company’s break-even sale in dollars using the formula is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 40%.

The break even sale in dollars in equation method is calculated as under:

The company’s break-even sale in dollars is $900,000.

b)

Calculate the break-even sales in units:

To earn a target profit of $90,000 the company has to sell the following number of units of its product which is calculated by the following formula:

The contribution margin per unit with the new selling price of $60 per unit is $24.

Therefore, to earn the target profit of $90,000 the company has to sell 18,750 units of its product.

Calculate the sales in dollars:

To attain the target profit of $90,000 the company has the sale in dollars of following amount calculated as under:

The contribution margin ratio of the company is 40%.

Therefore, to earn the target profit of $90,000 the company should have sales in dollars of $1,125,000.

c)

Calculate the variable cost:

If due to negotiation the company can be able to reduce its variable cost per unit by $3 then its variable cost per unit for the product would be $33.

Calculate the contribution per unit:

The contribution per unit of the product is calculated as under:

The contribution per unit after reduction of variable cost per unit by $3 is $27.

Calculate the break-even sales in units:

The break-even point in units is calculated as under:

The contribution margin per unit of the product is $27 and the fixed expense is $360,000.

The break-even sale in units of the company is 13,334units.

Calculate the break-even sales in dollars:

The company’s break-even sale in dollars using the formula is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 45%.

The break even sale in dollars in formula method is calculated as under:

The company’s break-even sale in dollars is $800,000.

Answer 3

1.

Calculate the contribution margin per unit:

The contribution margin is the difference between the selling price and variable expense per unit of the product. To compute the variable expenses per unit the contribution per unit will be calculated as under:

Calculate the variable expense per unit:

The contribution per unit is $24 which is the difference between the selling price per unit and variable expense per unit. Therefore the variable expense per unit is calculated as under:

To solve the equation $60 is subtracted to both the sides of the equation.

The variable expense per unit of the company is $36.

2(a)

Calculate the sales units:

The equation for the calculation of break-even point in unit sales is as under:

To solve the equation and know the unknown figure sales units we divide $24 to both the sides of equation.

The break-even point of unit sales of the company is 15,000units. It means if the company sells the 15,000 units it will have no profit no loss. If the company sells the units more than 15,000 units it will have profit and if it sells less than this point of sales then the company will have loss.

Calculate the break even sales dollars:

The company’s break-even sale in dollars using the equation is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 40%.

The break even sale in dollars using equation method is calculated as under:

To know the amount of sales in dollars we are dividing 0.40 to both the sides of the equation:

The company’s break-even sale in dollars is $900,000.

b)

Calculate the number of units to be sold:

Target profit means to earn the specified amount of profit the company has to sell particular amount of sales volume which calculated with the following formula:

To earn a target profit of $90,000 the company has to sell the following number of units of its product which is calculated by the following formula:

The contribution margin per unit with the selling price of $60 per unit is $24.

To solve the equation $360,000 is added to both the sides of equation.

To solve the equation and know the unknown figure of sales units $24 is divided to both the sides of equations.

Therefore, to earn the profit of $90,000 the company has to sell 18,750 units.

Calculate the sales in dollars:

The contribution margin ratio is with the new selling price of $60 per unit is $24.

To solve the equation $360,000 is added to both the sides of equation.

To solve the equation and know the unknown figure of sale in dollars 0.40 is divided to both the sides of equations.

Therefore, to earn the profit of $90,000 the company should have sale in dollars of $1,125,000.

c)

Calculate the variable cost:

If due to negotiation the company can be able to reduce its variable cost per unit by $3 then its variable cost per unit for the product would be $33.

Calculate the contribution per unit:

The contribution per unit of the product is calculated as under:

The contribution per unit after reduction of variable cost per unit by $3 is $27.

Calculate the break-even point:

The break-even point in units is calculated as under:

The contribution margin per unit of the product is $27 and the fixed expense is $360,000.

To solve the equation $360,000 is added to both the sides of equation.

To solve the equation and know the unknown figure of sales units $27 is divided to both the sides of equations.

Therefore, the new break-even point of sale units is 13,334 units.

Calculate the break-even sales in dollars:

The company’s break-even sale in dollars using the equation is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 45%.

The break even sale in dollars in equation method, to solve the equation $360,000 is added to both the sides of equation is calculated as under:

To solve the equation and know the unknown figure of sale in dollars 0.45 is divided to both the sides of equation.

If the variable cost per unit is reduced to $33 then the company’s break-even sale in dollars would be $800,000

3 (a)

Calculate the break-even sales in units:

The company’s break-even point in unit sales using the formula method is calculated by dividing the fixed expenses with contribution margin per unit. The contribution margin per unit of the product is $24 and the fixed expense is $360,000.

The break-even sale in units of the company is 15,000units.

The company’s break-even sale in dollars using the formula is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 40%.

The break even sale in dollars in equation method is calculated as under:

The company’s break-even sale in dollars is $900,000.

b)

Calculate the break-even sales in units:

To earn a target profit of $90,000 the company has to sell the following number of units of its product which is calculated by the following formula:

The contribution margin per unit with the new selling price of $60 per unit is $24.

Therefore, to earn the target profit of $90,000 the company has to sell 18,750 units of its product.

Calculate the sales in dollars:

To attain the target profit of $90,000 the company has the sale in dollars of following amount calculated as under:

The contribution margin ratio of the company is 40%.

Therefore, to earn the target profit of $90,000 the company should have sales in dollars of $1,125,000.

c)

Calculate the variable cost:

If due to negotiation the company can be able to reduce its variable cost per unit by $3 then its variable cost per unit for the product would be $33.

Calculate the contribution per unit:

The contribution per unit of the product is calculated as under:

The contribution per unit after reduction of variable cost per unit by $3 is $27.

Calculate the break-even sales in units:

The break-even point in units is calculated as under:

The contribution margin per unit of the product is $27 and the fixed expense is $360,000.

The break-even sale in units of the company is 13,334units.

Calculate the break-even sales in dollars:

The company’s break-even sale in dollars using the formula is calculated as under:

The contribution margin ratio is calculated by dividing the contribution margin with the sales. The contribution margin ratio is 45%.

The break even sale in dollars in formula method is calculated as under:

The company’s break-even sale in dollars is $800,000.