Question

ACCT 2301 Breakeven Handout #11 Yule Manufacturing Company reported the following data regarding a product it manufactures and sells. The sales price is $42. Variable costs Manufacturing Selling Fixed costs Manufacturing Selling and administrative $18 per unit 6 per unit $150,000 per year 66,000 per year a. Calculate the break-even point in units and dollars. b. Calculate the level of sales in units and dollars required to obtain a profit of $126,000. C. How much would the company earn if sales for the year were equal to 20,000 units? d. Suppose that variable selling costs could be eliminated by paying salespeople a fixed salary. If the company sells 20,000 units of product, how much could it pay for salespeople salaries per year, in lieu of variable selling costs, and have the same profit as in (c) above? 129

Answer 1

Solution a:

CM per unit = Selling price - Variable cost = $42 - ($18 + $6) = $18 per unit

CM ratio = $18 / $42 = 42.85714%

Break even point in units = Fixed costs / CM per unit = ($150,000 + $66,000) / $18 = 12000 units

Break even sales in dollars = Fixed costs / CM ratio = ($150,000 + $66,000) / 42.85714% = $504,000

Solution b:

Nos of units to be sold to earn desired profit = (Fixed costs + Target profit) / CM per unit

= ($216,000 + $126,000) / $18 = 19000 units

Desired sales in dollars to earn target profit = (Fixed costs + Target profit) / CM ratio = ($216,000 + 126,000) / 42.85714% = $798,000

Solution c:

Net income at 20000 units = Contribution margin - Fixed costs = (20000*$18) - $216,000 = $144,000

Solution d:

New CM per unit = $18 + $6 = $24 per unit

Desired profit = $144,000

Maximum fixed costs = 20000*$24 - $144,000 = $336,000

Maximum sales people salaries = $336,000 - $216,000 = $120,000