Question

PKRK sells chairs for $120 each and expects variable product costs to be $90 per unit with total fixed costs of $171,000. (Base Case)

1. Determine the break-even sales units for the company. (worth 1/2 pt)

2. What level of sales dollars should the company expect if PKRK wants to earn an operating profit of $85,000? (worth 1/2 pt)

3. Starting from the base case scenario, the sales manager is convinced that sales would increase from 6,800 to 7,900 units if the company simply replaces $60,000 of fixed costs which is paid to the sales rep with a sales commission of $12 per unit sold. Should the company make the change? Prove/justify your answer. (worth 2 pts)

4. Starting from the base case scenario, If PKRK wants to realize $100,000 in operating profit, what must be the minimum sales price, per unit, if they produce and sell 6,000 units and there is no change in variable cost per unit? (round to the nearest $0.10) (worth 2pts)

Answer 1

Req a:
Cm per unit:
Selling price per unit			120
Less: VC per unit			90
Cm per unit:			30
Break even units
Fixed cost:			171000
Divide: CM per unit			30
Break even units			5700
Req b:
CM ratio:
CM perr unit			30
Divide: Selling price per unit			120
CM ratio:			25%
Level of sales $ required:
Desired Income			85000
Add: Fixed cost			171000
Desired contribution:			256000
Divide: CM ratio			25%
Desired Level of Sales in $			1024000
Req c:
Differential Analysis
			Current	Revised
Sales revenue			816000	948000
			(6800*120)	(7900*120)
Less: Variable cost			612000	805800
			(6800*90)	(7900*102)
Contribution margin			204000	142200
less: Fixed cost			171000	111000
				(171000-60000)
Net income			33000	31200
No, The recommendation shall not be acceptable
Req d:
Desired Contribution for 6000 units:
Desired Profits				100000
Add: Fixed cost				171000
Desired Contribution for 6000 units:				271000
CM perr unit required:
Total desired contribution				271000
Divide: Number of units				6000
CM per unit required				45.17
Required Selling price per unit:
Variable cost per unit				90
Add: Required CM perr unit				45.17
Required Selling price per unit:				135.17