Question

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Problem 6.39A a-d Ronald Enterprises Ltd. has estimated the following costs for producing and selling 18,600 units of its product: Direct materials Direct labour Variable overhead Fixed overhead Variable selling and administrative expenses Fixed selling and administrative expenses $93,000 130,200 37,200 30,000 55,800 45,000 Ronald Enterprises' income tax rate is 40%. Given that the selling price of one unit is $37, calculate how many units Ronald Enterprises would have to sell in order to break even. Break-even units Assume the selling price is $42 per unit. Calculate how many units Ronald Enterprises would have to sell in order to produce a profit of $25,100 before taxes. Target units units

Answer 1

1 Break-Even Units = Fixed Costs/Contribution Margin 2 Break-Even Units = (Fixed Overhead + Fixed Selling and Administrative Expenses)/Contribution Margin 3 Break-Even Units = ($30,000+ $45,000)/20 4 Break-Even Units = 3,750 units 6 Desired Profit Units Calculation = (Fixed Costs + Desired Profit)/Contribution Margin 7 Desired Profit Units Calculation = ($75,000 + $25,100)/25 8 Desired Profit Units Calculation = 4,004 units 9 10 Ronald Enterprises Should Charge $33 per unit 11 Because, 12 Contribution $ 1,20,000 ($120,000/7,500 units = $16 per unit) 13 Less: Fixed Overhead $ 30,000 Hence Current Contribution is $20 per unit therefore, 14 Less: Fixed Selling and Administrative Overhead $ 45,000 Sales Price should be reduced by $4 15 Profit Before Tax $ 45,000 16 Less: Tax @40% $ 18,000 17 Profit $ 27,000 18 19 Ronald Enterprises should Charge $36.60 per unit 20 21 Contribution $ 1,70,520 22 Less: Fixed Overhead $ 30,000 23 Less: Fixed Selling and Administrative Overhead $ 45,000 24 Profit Before Tax 95,520 25 Less: Tax @40% $ 38,208 26 Profit $ 57,312