Question

Problem 1: DHL currently delivers packages for $9 each. The variable cost is $3 per package, and fixed costs are $60,000 per month. Compute the break-even point in both sales dollars and units under each of the following independent assumptions. Which assumption do you recommend and why? 1- The costs and selling price are the same as given. 2- Fixed costs are increased to $75,000. 3- The selling price is increased by 10%. (Fixed costs are $60,000.) 4- Variable cost is increased to $4.50 per unit. (Fixed costs are $60,000 and the selling price is $9.)

Answer 1

1	Sales Price per unit	$9.00
	Less:Variable cost per unit	$3.00
	Contribution margin per unit	$6.00
	Contribution margin ratio	66.67%
	Fixed Costs	$60,000
	Break-even sales(Fixed Costs/CM per unit)	10,000	units
	Break-even sales(Fixed Costs/CM ratio)	$90,000
2	Sales Price per unit	$9.00
	Less:Variable cost per unit	$3.00
	Contribution margin per unit	$6.00
	Contribution margin ratio	66.67%
	Fixed Costs	$75,000
	Break-even sales(Fixed Costs/CM per unit)	12,500	units
	Break-even sales(Fixed Costs/CM ratio)	$1,12,500
3	Sales Price per unit	$9.90
	Less:Variable cost per unit	$3.00
	Contribution margin per unit	$6.90
	Contribution margin ratio	69.70%
	Fixed Costs	$60,000
	Break-even sales(Fixed Costs/CM per unit)	8,696	units
	Break-even sales(Fixed Costs/CM ratio)	$86,087
4	Sales Price per unit	$9.00
	Less:Variable cost per unit	$4.50
	Contribution margin per unit	$4.50
	Contribution margin ratio	50.00%
	Fixed Costs	$60,000
	Break-even sales(Fixed Costs/CM per unit)	13,333	units
	Break-even sales(Fixed Costs/CM ratio)	$1,20,000
	Since the Break-even sales in Option 3 is lowest,hence it should be recommended as it will result into more Net Income