Question

19. Everest, Inc, currently produces and sells three products (Cars, Trucks, and Vans). Data concerning those products for the most recent month appear below: Trucks Vans Sales $2,000,000 $3,000,000 $5,000,000 Variable costs $1,400,000 $1,500,000 $4,600,000 Cars Monthly fixed expenses for the company are $1,750,000. Assuming the sales mix stays consistent, how many sales (dollars) are needed in order to reach a desired profit of $4,000,000? 20. Using the information in #19 above, Everest's senior management team recognizes that margins vary significantly across each product. The team is considering eliminating the product line with the lowest Contribution Margin ratio. If that product line is eliminated, the team estimates that future sales would be split evenly between the two remaining product lines. If this change takes place, the required sales to break even each month will decrease. By what percentage?

Answer 1

Answers

• Answer #19

A	Target desired profits	$4,000,000
B	Total fixed cost	$1,750,000
C = A+B	Total contribution margin required	$5,750,000
D	Overall CM ratio	25%	[See working below]
E = C/D	Sales dollars needed to attain target profits	$23,000,000	Answer

--Working

		Cars	Trucks	Vans	Total
A	Sales	$2,000,000	$3,000,000	$5,000,000	$10,000,000
B	Variable cost	$1,400,000	$1,500,000	$4,600,000	$7,500,000
C = A-B	Contribution margin	$600,000	$1,500,000	$400,000	$2,500,000
D = (C/A) x 100	CM Ratio	30%	50%	8%	25%

• Answer #20

--Working

           

		Cars	Trucks	Vans	Total
A	Sales	$4,500,000	$5,500,000		$10,000,000
B	CM Ratio	30%	50%
C = A x B	Contribution margin	$1,350,000	$2,750,000		$4,100,000
D = (C/A) x 100	Overall CM Ratio				41%

--Requirement asked

		Earlier	Now
A	Total fixed cost	$1,750,000	$1,750,000
B	Overall CM ratio	25%	41%
C = A/B	Sales required to Break even	$7,000,000	$4,268,293
D = $ 7000000 - 4268293	Decrease in Break even sales	$2,731,707
E = (D/$7000000) x100	Decrease in %	39%