Question

Polk Company developed the following information for its product:

	Per unit
Sales Price	$90
Variable cost	63
Contribution Margin	$27
Total Fixed cost	$1,080,000

Instructions

Answer the following independent questions and show computations using the contribution margin technique to support your answers.

1. How many units must be sold to break even?

2. What is the total sales that must be generated for the company to earn a profit of $60,000?

3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making?

4. Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $210,000.

Answer 1

1 Break even point unitsFixed cost/ Contribution margin per unit - $1,080,000 $27 Per unit 40,000 units 2 Number of units must be sold to get required profit (Fixed cost + Required profit) / Contribution margin per unit - ($1,080,000+S60,000)/$27 Per unit - 42,222.22 units Sales amount- 42.222.222 units * S90 Per unit -$3,800,000 3 Current sales units-45,000 units Contribution per unit$27 Per unit Current total contribution margin45,000 units S27 Per unitS1,215,000 Fixed cost - S1.080,000 Current net income = Current total contribution-Fixed cost-$1,215,000-$1,080,000-$135,000 Additional cost - S108,000 Total fixed cost -S1,080,000 $108,000 S1,188,000 Total contribution required to meet net income-Total fixed cost+Net income $1,188,000+ $135,000-$1,323,000 Number of units required to sold$1,323,000/S27 Per unit49,000 units Additional units to be sold - 49,000 units - 45,000 units - 4,000 units

4 New sale price per unit Current sale price+ 20% S90+ S90 * 20%-$108 New variable cost per unit-Current variable costt 10%-$63 + $63 * 10%-$69.3 New total fixed cost -Current total fixed cost + $210,000 - S1,080,000S210,000 S1,290,000 New contribution margin per unitS108- S69.3- S38.7 Per unit New break even point in units New total fixed cost/ New contribution margin per unit -$1,290,000 / S38.7 Per unit 33,333.33 units