Question

Lindon Company is the exclusive distributor for an automotive product that sells for $34.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $193,800 per year. The company plans to sell 21,600 units this year.
What are the variable expenses per unit?

2. What is the break-even point in unit sales and in dollar sales?

3. What amount of unit sales and dollar sales is required to attain a target profit of $91,800 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.40 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Answer 1

The computation is shown below:

a) Variable expense per unit is

= Selling price of a product × 1 - CM ratio

= $34 × 1 - 0.30

= $34 × 0.70

= $23.8

b)  The Break even point in units is

= Fixed cost ÷ Contribution margin per unit

= $193,800 ÷ $34 × 30%

= 19,000 units

And,

Break even sales is

= Fixed expenses ÷ Contribution margin ratio

= $193,800 ÷ 30%

= $646,000

c) Required unit Sales is

= (Fixed cost + Desired profit) ÷ Contribution margin per unit

= ($193,800 + $91,800) ÷ $10.20

= 28,000 units

And,

Required sales

= (Fixed cost + Desired profit) ÷ Contribution margin ratio

= ($193,800 + $91,800) ÷ 30%

= $952,000

d) New break even unit is

= $193,800 ÷ $13.60

= 14,250 units  

The contribution margin unit is

= $34 × 30% + $3.40

= $13.60

And,

New Break even Sales is

= 14,250 units  × $34

= $484,500