Question

Memtech Company is the exclusive distributor of a high-speed computer memory chip. The product sells for $50 per unit and has a CM ratio of 30%. The company's fixed expenses are $240,000 per year. Required: 1. What are the variable expenses per unit? 2. Determine the following: a. What is the break-even point in units and in sales dollars? b. What sales level in units and in sales dollars is required to earn an operating income of $75,000? c. Assume that through negotiation with the manufacturer, Memtech Company is able to reduce its variable expenses by $5 per unit. What is the company's new break-even point in units and in sales dollars? d. Referring to the original data, what sales level in dollars is required to earn an annual profit of $75,000 after taxes if the company's tax rate is 20%?

Answer 1

Solution 1:

Variable expenses per unit = Selling price - CM per unit = $50 - ($50*30%) = $35 per unit

Solution 2a:

Break even point in units = Fixed costs / CM per unit = $240,000 / $15 = 16000 units

Break even sales in dollars = Fixed costs / CM ratio = $240,000/30% = $800,000

Solution 2b:

Desired sales units to earn target income = (Fixed costs + Target income) / CM per unit = ($240,000 + $75,000) / $15 = 21000 units

Desired sales in dollars to earn target income = (Fixed costs + Target income) / CM ratio = ($240,000 + $75,000) / 30% = $1,050,000

Solution 2c:

New CM per unit = $15 + $5 = $20 per unit

New CM ratio = $20 / $50 = 40%

New break even units = Fixed costs / CM per unit = $240,000 / $20 = 12000 units

New Break even sales in dollars = Fixed costs / CM ratio = $240,000/40% = $600,000

Solution 2d:

Required before tax profit = $75,000 / (1-0.20) = $93,750

Required sales in dollar to earn after tax profit of $75,000 = (Fixed cost + Target before tax profit) / CM ratio

= ($240,000 + $93,750) / 30% = $1,112,500