Question

Problem 6-2

Keebee, Inc. sells laptops for $1,000 per unit. Variable costs per unit are $400 and monthly fixed costs are $2,400,000. The contribution margin income statement for last month is as follows.

Contribution Margin Income Statement 6,000 units sold
	Per unit	Total	Percent of sales
Sales price	$1,000	$6,000,000	100%
Variable cost	400	2,400,000	40%
Contribution margin	$600	3,600,000	60%
Fixed costs		2,400,000
Profit		$1,200,000
Break-even units = $2,400,000 ÷ 600 = 4,000 Break-even sales = 4,000 × $1,000 = $4,000,000

Scenario A:

1. Assume that the company increases the sales price by 20 percent with no effect on unit variable cost, compute the new unit contribution margin and contribution margin ratio.
2. Given the price increase described in question 1, compute the number of units that must be sold to earn the same profit as last month.

Scenario B:

1. The marketing manager proposes a new marketing campaign for next month. This campaign requires the company to reduce the sales price by 20 percent in order to boost sales. Also, the monthly advertising expense will increase by $600,000. Compute the new unit contribution margin and contribution margin ratio.
2. If the company accepts this campaign, compute the number of units that must be sold to earn the same profit as last month.

Answer 1

Solution of the above problem is as under:

Keebee Inc
Contribution Margin Income Statement
					Scenario A			Scenario B
Particulars	Unit Cost ($)	Units Sold	Total ($)	Percent of Sales	Unit Price	Units Sold	Total ($)	Unit Price	Units Sold	Total ($)
Sales Price	1000	6000	6000000	100	1200	4500	5400000	800	10500	8400000
Less: Variable Cost	-400	6000	-2400000	40	-400	4500	-1800000	-400	10500	-4200000
Contribution Margin	600		3600000	60	800	4500	3600000	400	10500	4200000
Less: Fixed Costs			-2400000				-2400000			-3000000
Profit			1200000				1200000			1200000
Break-Even Point (in Units) = Fixed Costs/Contribution per unit
$2400000/$600=	4000	Units
Break-Even Point (in $) = Sale Price per unit X Break-Even Point in units
$1000 X 4000 Units	4000000
Scenariao A: Company increases the sales price by 20% with no effect on unit Variable Cost
Computation of Contribution Margin Ratio
Contribution Margin Ratio=	Contribution Margin (Sales-Variable Cost)/Sales	(800/1200)*100	66.67%
Assume X Units are sold in Scenario A to earn the same profit (i.e. $1200000) as that of previous month.
Using the Equation Method,
Contribution Margin-Fixed Costs=Profit
.i.e 800X-2400000=1200000
This implies, X: 3600000/800
Hence X=4500 Units
Scenario B: Reduce the sales price by 20% ti increase the units sold and increase in monthly advertising cost by $600000
Computation of Contribution Margin Ratio
Contribution Margin Ratio=	Contribution Margin (Sales-Variable Cost)/Sales	(400/800)*100	50.00%
Assume Y Units are sold in Scenario B to earn the same profit (i.e. $1200000) as that of previous month.
Using the Equation Method,
Contribution Margin-Fixed Costs=Profit
.i.e 400X-3000000=1200000
This implies, X: 4200000/400
Hence X=10500 Units