Question

Lindon Company is the exclusive distributor for an automotive product that sells for $38.00 per unit and has a CM ratio of 30%. The company's fixed expenses are $228,000 per year. The company plans to sell 23,000 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 $114.000 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.80 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 $114,000? 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

Answer 1

2. 3. Variable expense per unit Break-even point in units Break-even point in dollar sales 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 $26.60 20,000 units $760,000 | 30,000 units $1,140,000 15,000 units $570,000 $855,000 4.

1. Variable expenses per unit: • Contribution Margin ratio = 30% Therefore, Variable expense ratio = 70% • Variable expenses per unit = Unit selling price x variable expense ratio = $38 x 70% = $26.60 00.20 2. Break-even point in units: • The breakeven point (BEP) is the volume at which there is neither profits nor losses. At breakeven point, contribution earned exactly equals total fixed costs. Contribution per unit = Unit selling price - Unit variable expenses = $38.00 - $26.60 = $11.40 Fixed costs - $228.000 = 20.000 units Break - even point in units = com Contribution margin per unit $11.40 o At this level, fixed costs = contribution; 20,000 x $11.40 = $228,000 Break-even point in dollar sales: Fixed costs Break - even point in dollar sales = Contribution margin ratio 30% o Alternatively, BEP in units x Unit price = 20,000 units X $38 = $760,000 $228.000 – $760,000 Verification Sales (BEP). Less: variable costs Contribution margin Less: fixed expenses Profit 20,000 units X $38 20,000 units x $26.60 20,000 units x $11.40 $760,000 $532,000 $228,000 $228,000 $0

$228,000 + $114,000 $11.40 3. Unit sales needed to attain target profit . Target profit = $114,000 + Fixed expenses + Target profit No. of units to earn target profit = - Contribution per unit 30,000 units Dollar sales needed to attain target profit Fixed expenses + Target profit Dollar sales to earn target profit = Contribution margin ratio $1,140,000 $228.000 + $114,000 30% Verification Sales Less: variable costs Contribution margin Less: fixed expenses Profit 30,000 units X $38 30,000 units X $26.60 30,000 units x $11.40 $1,140,000 $798,000 $342,000 $228,000 $114,000

4. New break-even point in unit sales: • New variable cost = $26.60 - $3.80 = $22.80 New contribution margin = Unit price - New unit variable expenses = $38.00 - $22.80 = $15.20 Unit contribution $15.20 New CM ratio = = 40% Unit selling price $38 Fixed costs $228,000 Break – even point in units = com -= 15,000 units Contribution margin per unit New break-even point in dollar sales: Fixed costs $228,000 • Break – even point in dollar sales = 100 = $570,000 Contribution margin ratio Verification Sales (BEP) Less: variable costs Contribution margin Less: fixed expenses Profit 15,000 units X $38 15,000 units X $22.80 15,000 units x $15.20 $570,000 $342,000 $228,000 $228,000 $0

$228,000 + $114,000 $15.20 Dollar sales needed to attain target profit: Target profit = $114,000 . Fixed expenses + Target profit No.of units to earn target profit = - Contribution per unit 22,500 units Dollar sales needed to attain target profit C Fixed expenses + Target profit Dollar sales to earn target profit = ! Contribution margin ratio $855,000 $228,000 + $114,000 40% Verification Sales Less: variable costs Contribution margin Less: fixed expenses Profit 22,500 units X $38 22,500 units X $22.80 22,500 units x $15.20 $855,000 $513,000 $342,000 $228,000 $114,000