Question

Lindon Company is the exclusive distributor for an automotive product that sells for $32.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $177,600 per year. The company plans to sell 20,900 units this year.

1. Variable expense per unit 2. Break-even point in units Break-even point in dollar sales 3. Unit sales needed to attain target profit Dollar sales needed to attain target profit New break-even point in unit sales New break-even point in dollar sales Dollar sales needed to attain target profit 4.

1. What are the variable expenses per unit? (Round 2 decimals)

2. What is the break-even point in unit sales and in dollar sales?

3. What amount of unit sales and dollar sales is required to attain a target profit of $81,600 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.20 per unit. What is the company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $81,600?

Answer 1

(1)-The variable expenses per unit

The variable expenses per unit = Selling price per unit x (100% - Contribution margin ratio)

= $32.00 per unit x (100% - 30%)

= $32.00 per unit x 0.70

= $22.40 per unit

(2)-The break-even point in unit sales and in dollar sales

The break-even point in unit sales = Total fixed expenses / Contribution margin per unit

= $177,600 / [$32.00 x 0.30]

= $177,600 / $9.60 per unit

= 18,500 units

The break-even point in dollar sales = Total fixed expenses / Contribution margin ratio

= $177,600 / 0.30

= $592,000

(3)-The amount unit sales and dollar sales is required to attain a target profit of $81,600 per year

The amount unit sales required to attain a target profit of $81,600 per year = [Total fixed expenses + Target profit] / Contribution margin per unit

= [$177,600 + $81,600] / [$32.00 x 0.30]

= $259,200 / $9.60 per unit

= 27,000 units

The amount dollar sales required to attain a target profit of $81,600 per year = [Total fixed expenses + Target profit] / Contribution margin ratio

= [$177,600 + $81,600] / 0.30

= $259,200 / 0.30

= $864,000

4. The company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $81,600

New break-even point in unit sales = Total fixed expenses / Contribution margin per unit

= $177,600 / [$9.60 + $3.20]

= $177,600 / $12.80 per unit

= 13,875 units

New break-even point in dollar sales = New break-even point in unit sales x Selling price per unit

= 13,875 units x $32.00 per unit

= $444,000

Dollar sales is required to attain a target profit of $81,600 = [Total fixed expenses + Target profit] / Contribution margin ratio

= [$177,600 + $81,600] / 0.40

= $259,200 / 0.40

= $648,000