Question

Lindon Company is the exclusive distributor for an automotive product that sells for $30.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $162,000 per year. The company plans to sell 20,200 units this year.

Required:

1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.)

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 $72,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.00 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 $72,000?

Answer 1

1) Variable expense per unit:

100% - Contribution Margin Ratio (CM Ratio) = Variable cost to sales Ratio

100% - 30% = 70%

Variable expense per unit = Selling Price Per Unit * Variable cost to sales Ratio

= $30 per unit * 70/100

= $21 per unit

Therefore, variable cost per unit is $21.

2) Break-even point in unit sales:

Break-even point in unit sales = Fixed Cost / Contribution Margin Per Unit

= $162,000 / ($30 - $21)

= $162,000 / $9 per unit

= 18,000 Units

Therefore, break-even point in unit sales is 18,000 units.

Break-even point in sales dollars:

Break-even point in sales dollars = Fixed Cost / Contribution Margin Ratio

= $162,000 / 0.30

= $540,000

Therefore, break-even point in sales dollars is $540,000.

3)

Unit sales required to attain a profit of $72,000 = Fixed Cost + Target Profit / Contribution Margin per unit

= ($162,000 + $72,000) / $9 per unit

= $234,000 / $9 per unit

= 26,000 Units

Therefore, unit sales required to attain a profit of $72,000 is 26,000 units.

Dollar sales required to attain a profit of $72,000 = Fixed Cost + Target Profit / Contribution Margin Ratio

= ($162,000 + $72,000) / 0.30

= $234,000 / 0.30

= $780,000

Therefore, dollar sales required to attain a profit of $72,000 is $780,000.

4)

Revised Variable expense per unit = Current Variable expense per unit + $3 per unit

= $21 per unit + $3 per unit

= $24 per unit

Therefore, Revised variable cost per unit is $24.

Break-even point in unit sales:

Break-even point in unit sales = Fixed Cost / Contribution Margin Per Unit

= $162,000 / ($30 - $24)

= $162,000 / $6 per unit

= 27,000 Units

Therefore, the new break-even point in unit sales is 27,000 units.

Break-even point in sales dollars:

Break-even point in sales dollars = Fixed Cost / Contribution Margin Ratio

= $162,000 / ($6 per unit /30 per unit)

= $162,000 / 0.20

= $810,000

Therefore, the new break-even point in sales dollars is $810,000.

Dollar sales required to attain a profit of $72,000 = Fixed Cost + Target Profit / New Contribution Margin Ratio

= ($162,000 + $72,000) / 0.20

= $234,000 / 0.20

= $1,170,000

Therefore, dollar sales required to attain a profit of $72,000 is $1,170,000.