Question

Vernon Manufacturing Company reported the following data regarding a product it manufactures and sells. The sales price is $45.

Variable costs
Manufacturing	$	12	per unit
Selling		5	per unit
Fixed costs
Manufacturing	$	168,000	per year
Selling and administrative	$	184,800	per year

Required

1. Use the per-unit contribution margin approach to determine the break-even point in units and dollars.

2. Use the per-unit contribution margin approach to determine the level of sales in units and dollars required to obtain a profit of $207,200.

3. Suppose that variable selling costs could be eliminated by employing a salaried sales force. If the company could sell 20,200 units, how much could it pay in salaries for salespeople and still have a profit of $207,200? (Hint: Use the equation method.)

Answer 1

Answer a.

Selling Price per unit = $45.00

Variable Cost per unit = Variable Manufacturing per unit + Variable Selling per unit
Variable Cost per unit = $12.00 + $5.00
Variable Cost per unit = $17.00

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $45.00 - $17.00
Contribution Margin per unit = $28.00

Fixed Expenses = Fixed Manufacturing + Fixed Selling and Administrative
Fixed Expenses = $168,000 + $184,800
Fixed Expenses = $352,800

Breakeven Sales in units = Fixed Expenses / Contribution Margin per unit
Breakeven Sales in units = $352,800/ $28.00
Breakeven Sales in units = 12,600 Units

Breakeven Sales in Dollars = Breakeven Sales in units * Selling Price per unit
Breakeven Sales in Dollars = 12,600 * $45
Breakeven Sales in Dollars = $567,000

Answer b.

Desired Sales Units = Desired Profit + Fixed Cost / Contribution Margin per Unit
Desired Sales Units = ($207,200 + $352,800) / $28.00
Desired Sales Units = 20,000 Units

Desired Dollar Sales = Desired Sales Units * Selling Price per Unit
Desired Dollar Sales = 20,000 * $45
Desired Dollar Sales = $900,000

Answer c.

Proposed Variable Cost per Unit = $12
Proposed Contribution Margin per Unit = $45 - $12 = $33

Desired Profit = $207,200

Units Sold = 20,200

Profit = Contribution Margin – Fixed Cost
$207,200 = (20,200 * $33) – Fixed Cost
$207,200 = $666,600 – Fixed Cost
Fixed Cost = $459,400

Fixed Expenses = Fixed Manufacturing + Fixed Selling and Administrative + Proposed Employees Salaries
$459,400 = $168,000 + $184,800 + Proposed Employees Salaries
Proposed Employees Salaries = $106,600

The Company could pay $106,600 towards salaries for salespeople and can still have a profit of $207,200.