Question

PKRK sells chairs for $120 each and expects variable product costs to be $90 per unit with total fixed costs of $171,000 (Base Case) a. Determine the break-even sales units for the company (worth 1/2 pt) b. What level of sales dollars should the company expect if PKRK wants to earn an operating profit of $85,000? (worth I/2 pt) c. Starting from the basc case scenario, the sales manager is convinced that sales would increase from 6,800 to 7,900 units if the company simply replaces $60,000 of fixed costs which is paid to the sales rep with a sales commission of S12 per unit sold. Should the company mske the change7 Provejustify your answer. (worth 2 pts) d. Starting from the base case scenario, If PKRK wants to realize $100,000 in operating profit, what must be the minimum sales price, per unit, if they produce and sell 6,000 units and there is no change in variable cost per

Answer 1

a. Computation of Breakeven sales
First calculate Contribution Margin Per Unit
Selling price per unit	$120
Less: Variable cost per unit	$90
Contribution Margin per Unit	$30
Fixed cost:	$1,71,000
Contribution Margin per unit	$30
Break even units ( Fixed Cost per Unit/ CM per Unit)	5700
Hence, Break Even sales will be 5700 unit

b computation of level of sales to earn profit of $85000
Contribution Margin per Unit	$30
Selling price per unit	$120
Contribution Margin Ratio ( 30/120X100)	25%
Desired Income	$85,000
Add: Fixed cost	$1,71,000
Desired contribution:	$2,56,000
CM Ratio	25%
Desired Level of Sales ( 256000/25%)	1024000

3. statement Showing Differential Analysis
	Current	Revised
Sales revenue	$8,16,000	$9,48,000
	(6800*120)	(7900*120)
Less: Variable cost	$6,12,000	$8,05,800
	(6800*90)	(7900*102)
Contribution margin	$2,04,000	$1,42,200
less: Fixed cost	$1,71,000	$1,11,000
		(171000-60000)
Net income	$33,000	$31,200
Net Income decrease by $1800 . Hence it's not recommended

b compuation of minimum selling price per unit
Desired Profits	$1,00,000
Add: Fixed cost	$1,71,000
Desired Contribution for 6000 units:	$2,71,000
Total desired contribution	$2,71,000
No. of Sale Unit	6000
Contribution Margin Per Unit Required ( 271000/6000)	$45.17
Variable cost per Unit	$90.00
Selling Price unit would be ( 45.17 + 90)	$135.17
Required Selling price per unit:	135.17