Question

1. Air Company sells it product for $120 per unit. Estimated costs for October 2013 are as follows:

Cost
Variable product costs per unit	$60
Variable sales commission per unit	10% of selling price
Total fixed production overheads	$25,000
Total fixed administrative salaries	$15,000

Required:
a) Calculate the contribution margin per unit (Hint – you will need to identify the company’s variable costs)

b) Calculate the company’s break-even point in units and total sales dollars.

c) How many units must be sold during October to earn a profit of $10,000?

d) Assume that sales commission is now $10 for every unit sold. Calculate a revised break-even point in units

Answer 1

Variable costs per unit = Variable product cost per unit + Variable sales commossions per unit

= $60 + $12 ($120 * 10%)

= $72

Fixed costs = Fixed production overheads + Fixed administrative salaries

= $25,000 + $15,000

= $40,000

a) Contribution margin per unit = Selling price per unit - Variable costs per unit

= $120 - $72

= $48

b) Break-even point in units = Fixed costs / Contribution margin per unit

= $40,000 / $48

= 833 units

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $48 / $120

= 0.4

Break-even dollars = Fixed costs / Contribution margin ratio

= $40,000 / 0.4

= $100,000

c) Units to be sold = (Fixed costs + Desired profit) / Contribution margin per unit

= ($40,000 + $10,000) / $48

= 1,042

d) Variable costs per unit = Variable product cost per unit + Variable sales commossions per unit

= $60 + $10

= $70

Contribution margin per unit = Selling price per unit - Variable costs per unit

= $120 - $70

= $50

Break-even point in units = Fixed costs / Contribution margin per unit

= $40,000 / $50

= 800 units