Question

Lindon Company is the exclusive distributor for an automotive product that sells for $42.00 per unit and has a CM ratio of 30%. The company's fixed expenses are $264,600 per year. The company plans to sell 24,400 units this year. Required: 1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.) 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 $138,600 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.20 per unit. What is the company's new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $138,600? $ 29.40 21,000 882,000 $ 1. Variable expense per unit 2. Break-even point in units Break-even point in dollar sales Unit sales needed to attain target profit Dollar sales needed to attain target profit New break-even point in unit sales New break-even point in dollar sales Dollar sales needed to attain target profit

Answer 1

1. Variable expenses per unit

In this example CM ratio is 30 % i.e. contribution when 30 % contribution then 70 % is variable cost.

Total variable cost = Total sales * 70 %

                                 = $ 1,024,800 * 70%

                                 = $ 717,360

Variable cost per unit = $ 717,360 / 24,400 units

                                      = $ 29.40 per unit

Contribution per unit:

Selling price per unit	$ 42.00
Variable cost per unit	($ 29.40)
Contribution per unit	$ 12.60

2. Breakeven point in units and Dollar sales.

Breakeven points find out fixed cost divided by contribution per unit or contribution margin ratio.

Breakeven point mean at this level company neither profit and nor incurred loss.

In second word at this level total revenue equal to total cost.

Breakeven point in units

Fixed expenses	$ 264,600
÷ Contribution per unit	$ 12.60
Breakeven point	21,000 units

Breakeven point in dollars = 21,000 units × $ 42.00 selling price

                                              = $ 882,000 Sales at BEP

OR

Breakeven point in dollars = Fixed Cost ÷ CM ratio

                                           = $ 264,600 ÷ 30 %

                                           = $ 882,000 BEP sales

                                  

3. Required sales when target profit $ 138,600.

     Required sales in units

                   = Fixed Cost + Required profit ÷ Contribution per unit

                   = $ 264,600 + $ 138,600 ÷ $ 12.60

                   = $ 403,200 / $ 12.60

                   = 32,000 units required sales

4. New Breakeven point and required sales when variable cost reduced $

     4.20 per unit.

• If any changes in variable cost then will be effect on breakeven point
• When variable cost is decreased then automatically contribution per unit will be increased.

New variable cost per unit = Present variable cost – reduced

                                          = $ 29.40 - $ 4.20

                                              = $ 25.20 per unit

Present variable cost	$ 29.40 per unit
Less : reduced	( $ 4.20 per unit )
New variable cost per unit	$ 25.20 per unit

New Contribution per unit:

Selling price per unit	$ 42.00
Variable cost per unit	($ 25.20)
Contribution per unit	$ 16.80

New Breakeven point = Fixed Cost / New contribution

                                     = $ 264,600 / $ 16.80

                                   = 15,750 units

New Required sales

                   = Fixed Cost + Required profit ÷ Contribution per unit

                   = $ 264,600 + $ 138,600 ÷ $ 16.80

                   = $ 403,200 / $ 16.80

                   = 24,000 units required sales

company can reduced it is variable cost per unit if possible.