Question

Solomon Manufacturing Company reported the following data regarding a product it manufactures and sells. The sales price is $44. Variable costs Manufacturing Selling Fixed costs Manufacturing Selling and administrative 16 per unit 3 per unit $160,000 per year $172,500 per year Required a. Use the per-unit contribution margin approach to determine the break-even point in units and dollars. b. Use the per-unit contribution margin approach to determine the level of sales in units and dollars required to obtain a profit of $177,500. c. Suppose that variable selling costs could be eliminated by employing a salaried sales force. If the company could sell 20,600 units, how much could it pay in salaries for salespeople and still have a profit of $177,500? (Hint: Use the equation method.) S a. Break-even point in units Break-even point in dollars b. Required sales in units Required sales in dollars c. Fixed cost of salaries 13,300 585,200 20,400

Answer 1

A) Break even point in units = Fixed cost / Contribution per unit

Fixed cost = $ 160,000 + $ 172,500 = $ 332,500

Contribution per unit = Selling price per unit - Total variable cost per unit

Contribution per unit = $ 44 - [ $ 16 + $ 3 ] = $ 25

Break even point in units = $ 332,500/ $ 25 = 13,300

B) Break even point in dollars = Fixed cost / PV ratio

PV ratio = [Contribution per unit / Sales revenue per unit ] X 100%

PV ratio = [ $ 25 / $ 44 ] X 100 % = 56.8182%

Break even point in dollars = $ 332,500 / 56.8182%

Break even point in dollars = $ 332,500 X100/ 56.8182= $ 585,200

B) Required profit = $ 177,500

Fixed cost = $ 332,500

Contribution per unit = $ 25

Break even sales in units = [ Fixed cost + Required Profit ] / Contribution per unit

Break even sales in units = [ $ 332,500 + $ 177,500 ] / $ 25 = 20,400

Break even sales in dollars = [ Fixed cost + Required Profit ] / PV ratio

Break even sales in dollars = [ $ 332,500 + $ 177,500 ] / 56.8182 %

Break even sales in dollars = $ 510,000 X 100/56.8182 = $ 897,600

C) Revised variable cost = $ 16 per unit after elimination of variable selling expenses.

Let, salaries of sales people = x, ( which is a fixed cost of salaries )

Revised Fixed cost = $ 160,000 + $ 172,500 + x

Revised Fixed cost = $ 332,500 + x

Revised output( sales units) = 20,600

Required Profit = $ 177,500

As per equation method,

Total sales revenue - [Total variable cost + Total fixed cost] = Required Profit

[ 20,600 X $ 44] - [ { 20,600 X $ 16 } +  { $ 332,500 + x} ] = $ 177,500

$ 906,400 - [ $ 329,600 +  $ 332,500 + x ] = $ 177,500

$ 906,400 - 662,100 -  x = $ 177,500

x = $ 244,300 - $ 177,500 = $ 66,800

Thus, Salaries for sales person ( Fixed cost of salaries) = $ 66,800

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