Benson Company makes and sells products with variable costs of $41 each. Benson incurs annual fixed costs of $27,300. The current sales price is $62.
Problem 3-23A Part a
Required The following requirements are interdependent. For example, the $6,300 desired profit introduced in Requirement calso applies to subsequent requirements. Likewise, the $53 sales price introduced in Requirement d applies to the subsequent requirements.
a. Determine the contribution margin per unit.
b. Determine the break-even point in units and in dollars. Prepare an income statement using the contribution margin format.
c. Suppose that Benson desires to earn a $6,300 profit. Determine the sales volume in units and dollars required to earn the desired profit. Prepare an income statement using the contribution margin format.
A. Contribution Margin per unit | |||||||||||||
Contribution Margin p.u = Sale price p.u - Variable Cost p.u = 62-41 = 21$ p.u | |||||||||||||
B1. Break-even point | |||||||||||||
P/V Ratio or Contribution Margin ratio = (Contribution p.u / Sale price)*100 = (21/62)*100 = 33.87% | |||||||||||||
Fixed Costs = 27,300 $ | |||||||||||||
Break-even point (in Units) = Fixed Cost / Contribution p.u = 27,300/21 = 1300 units | |||||||||||||
Break-even point (in Sales) = Fixed Cost / PV Ratio = 27,300/33.871% = 80,600 $ | |||||||||||||
B2. Income Statement | |||||||||||||
BENSON Company | |||||||||||||
Income Statement | |||||||||||||
Particulars | Amount ($) | ||||||||||||
Sales | 80,600 | ||||||||||||
Less : VC | 53,300 | ||||||||||||
Contribution Margin | 27,300 | ||||||||||||
Less : Fixed Cost | 27,300 | ||||||||||||
Profit | - | ||||||||||||
C1. Sales in volume and units if desired profit is 6300 $ | |||||||||||||
Unit Sales = (Fixed Costs + Target Profit) / Contribution Margin per unit | |||||||||||||
Unit Sales when target profit is 6300 $ = (27,300 $ + 6300 $) / 21$ p.u = 1600 units | |||||||||||||
Sales (in $)= (Fixed Costs + Target Profit) / Contribution Ratio(PV Ratio) | |||||||||||||
Sales (in $) when target profit is 6300 $ = (27,300+6300)/33.871% = 99,200 $ | |||||||||||||
C2. Income Statement | |||||||||||||
BENSON Company | |||||||||||||
Income Statement | |||||||||||||
Particulars | Amount ($) | ||||||||||||
Sales | 99,200 | ||||||||||||
Less : VC | 65,600 | ||||||||||||
Contribution Margin | 33,600 | ||||||||||||
Less : Fixed Cost | 27,300 | ||||||||||||
Profit | 6,300 | ||||||||||||
D1. Sales volume when SP drops to 53$ | |||||||||||||
New Contribution margin per unit = 53$-41$ = 12$ | |||||||||||||
New PV Ratio = (12/53)*100 = 22.6415% | |||||||||||||
Hence Sales Volume in units as per formula mentioned in C1 = (27,300+6300)/12 = 2800 units | |||||||||||||
Hence Sales Volume in Dollars as per formula mentioned in C1 = (27,300+6300)/22.6415% = 148,400 $ | |||||||||||||
D2. Income Statement |
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BENSON Company |
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Income Statement | |||||||||||||
Particulars | Amount ($) |
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Sales | 1,48,400 | (2800 units * 53$ p.u) | |||||||||||
Less : VC | 1,14,800 | (2800 units * 41$ p.u) | |||||||||||
Contribution Margin | 33,600 | ||||||||||||
Less : Fixed Cost | 27,300 |
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Profit | 6,300 | ||||||||||||
E1. Sales figure in volume and dollars when FC drops to 20,100 $ | |||||||||||||
Sales Volume in units when FC drops to 20,100 $ = (20,100+6,300)/12 = 2200 units | |||||||||||||
Sales Volume in $ when FC drops to 20,100 $ = (20,100+6,300)/22.6415% = 116,600 $ | |||||||||||||
E2. Income Statement | |||||||||||||
BENSON Company |
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Income Statement | |||||||||||||
Particulars | Amount ($) |
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Sales | 1,16,600 | (2200 units * 53$ p.u) | |||||||||||
Less : VC | 90,200 | (2200 units * 41$ p.u) | |||||||||||
Contribution Margin | 26,400 | ||||||||||||
Less : Fixed Cost | 20,100 | ||||||||||||
Profit | 6,300 |
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