Question

Contribution Margin Ratio, Break-Even Sales Revenue, Sales Revenue for Target Profit

Schylar Pharmaceuticals, Inc., plans to sell 100,000 units of antibiotic at an average price of $22 each in the coming year. Total variable costs equal $660,000. Total fixed costs equal $7,200,000.

Required:

1. What is the contribution margin per unit? Round your answer to the nearest cent.
$

What is the contribution margin ratio? Round your answer to two decimal places. (Express as a decimal-based answer rather than a whole percent amount.)

2. Calculate the sales revenue needed to break even. Round your answer to the nearest dollar.
$

3. Calculate the sales revenue needed to achieve a target profit of $235,000. Round your answer to the nearest dollar.
$

4. What if the average price per unit increased to $23.50? Recalculate the following:

a. Contribution margin per unit. Round your answer to the nearest cent.
$

b. Contribution margin ratio. Enter your answer as a decimal value (not a percentage), rounded to four decimal places.

c. Sales revenue needed to break even. In your computations, use your rounded answer from part (4-b) above for the contribution margin ratio, and round your final answer to the nearest dollar.
$

d. Sales revenue needed to achieve a target profit of $235,000. In your computations, use your rounded answer from part (4-b) above for the contribution margin ratio, and round your final answer to the nearest dollar.
$

Answer 1

Working Notes

Fixed Costs amount given in question is $ 72 lacs, I think it is 7.2 lacs. I have taken 7.2 lacs.

	At Selling Price $ 22 per Unit		At Selling Price $ 23.50
Particulars	Amount ($)	Per Unit ($)	Amount ($)	Per Unit ($)
Sales Revenue (100,000 units X $ 22 per Unit)	22,00,000	22	23,50,000	23.50
Less Variable Cost (100,000 units X 6.6 per Unit)	660,000	6.60	6,60,000	6.60
Contribution Margin	15,40,000	15.40	16,90,000	16.90
Less Fixed Cost	720,000		720,000
Net Profit	820,000		970,000

Following are the answers of required questions.

1. Contribution Margin Per Unit

Formula of Contribution Margin Per Unit = Selling Price Per Unit - Variable cost per unit

=$ 22- $ 6.6

= $ 15.40

Thus Contribution Margin per unit is $ 15.40

Formula of contribution margin ratio = (Contribution margin per unit / Selling price per unit ) X 100%

As per above working notes

Contribution margin per unit is %15.40 and selling price per unit is $ 22

Thus contribution margin ratio = (15.40/22) X 100%

= 70%

2. Calculation of sales revenue needed to breakeven

Formula of breakeven point in units = Fixed Costs / Contribution margin per unit

= 720,000/ 15.40

= 46,753.25 Units

Approximate 46,753 units

Now Break Even points in Dollars = Sales price per unit X Break-even points in units

= $ 22 X 46,753 Units

= $ 10,28,566

sales revenue needed to breakeven is $ 10,28,566

3. Calculation of the sales revenue needed to achieve a target profit of $235,000.

Formula is as follows

Sales units needed to achieve target profit = (Target profit in Dollars / Contribution margin per unit ) + Break-even point in units

= ($235,000 / 15.40) + 46,753 units

= 15,260 units + 46,753 units

= 62,013 units

Sales revenue in dollars = 62,013 units X $ 22

= $ 13,64,286

4-a. Contribution Margin Per Unit if selling price increased to $ 23.50

Formula of Contribution Margin Per Unit = Selling Price Per Unit - Variable cost per unit

=$ 23.50 - $ 6.6

= $ 16.90

Thus Contribution Margin per unit is $ 16.90

Formula of contribution margin ratio = (Contribution margin per unit / Selling price per unit ) X 100%

As per above working notes

Contribution margin per unit is 16.90 and selling price per unit is $ 23.50

Thus contribution margin ratio = (16.90/23.50) X 100%

= 71.91%

4-b. Calculation of sales revenue needed to breakeven

Formula of breakeven point in units = Fixed Costs / Contribution margin per unit

= 720,000/ 16.90

= 42,603.55 Units

Approximate 42,604 units

Now Break Even points in Dollars = Sales price per unit X Break-even points in units

= $ 23.50 X 42,604 Units

= $ 10,01,194

sales revenue needed to breakeven is $ 10,01,194

4 - c Calculation of the sales revenue needed to achieve a target profit of $235,000.

Formula is as follows

Sales units needed to achieve target profit = (Target profit in Dollars / Contribution margin per unit ) + Break-even point in units

= ($235,000 / 16.90) + 42,604 units

= 13,905 units + 42,604 units

= 56,509 units

Sales revenue in dollars = 56,509 units X $ 23.50

= $ 13,27,962