Question

Benson Company makes and sells products with variable costs of $41 each. Benson incurs annual fixed costs of $27,300. The current sales price is $62. 

Problem 3-23A Part a 

Required The following requirements are interdependent. For example, the $6,300 desired profit introduced in Requirement calso applies to subsequent requirements. Likewise, the $53 sales price introduced in Requirement d applies to the subsequent requirements. 

a. Determine the contribution margin per unit. 

b. Determine the break-even point in units and in dollars. Prepare an income statement using the contribution margin format.

c. Suppose that Benson desires to earn a $6,300 profit. Determine the sales volume in units and dollars required to earn the desired profit. Prepare an income statement using the contribution margin format. 

Answer 1

A. Contribution Margin per unit
Contribution Margin p.u = Sale price p.u - Variable Cost p.u = 62-41 = 21$ p.u
B1. Break-even point
P/V Ratio or Contribution Margin ratio = (Contribution p.u / Sale price)*100 = (21/62)*100 = 33.87%
Fixed Costs = 27,300 $
Break-even point (in Units) = Fixed Cost / Contribution p.u = 27,300/21 = 1300 units
Break-even point (in Sales) = Fixed Cost / PV Ratio = 27,300/33.871% = 80,600 $
B2. Income Statement
BENSON Company
Income Statement
Particulars	Amount ($)
Sales	80,600
Less : VC	53,300
Contribution Margin	27,300
Less : Fixed Cost	27,300
Profit	-
C1. Sales in volume and units if desired profit is 6300 $
Unit Sales = (Fixed Costs + Target Profit) / Contribution Margin per unit
Unit Sales when target profit is 6300 $ = (27,300 $ + 6300 $) / 21$ p.u = 1600 units
Sales (in $)= (Fixed Costs + Target Profit) / Contribution Ratio(PV Ratio)
Sales (in $) when target profit is 6300 $ = (27,300+6300)/33.871% = 99,200 $
C2. Income Statement
BENSON Company
Income Statement
Particulars	Amount ($)
Sales	99,200
Less : VC	65,600
Contribution Margin	33,600
Less : Fixed Cost	27,300
Profit	6,300
D1. Sales volume when SP drops to 53$
New Contribution margin per unit = 53$-41$ = 12$
New PV Ratio = (12/53)*100 = 22.6415%
Hence Sales Volume in units as per formula mentioned in C1 = (27,300+6300)/12 = 2800 units
Hence Sales Volume in Dollars as per formula mentioned in C1 = (27,300+6300)/22.6415% = 148,400 $
D2. Income Statement
BENSON Company
Income Statement
Particulars	Amount ($)
Sales	1,48,400	(2800 units * 53$ p.u)
Less : VC	1,14,800	(2800 units * 41$ p.u)
Contribution Margin	33,600
Less : Fixed Cost	27,300
Profit	6,300
E1. Sales figure in volume and dollars when FC drops to 20,100 $
Sales Volume in units when FC drops to 20,100 $ = (20,100+6,300)/12 = 2200 units
Sales Volume in $ when FC drops to 20,100 $ = (20,100+6,300)/22.6415% = 116,600 $
E2. Income Statement
BENSON Company
Income Statement
Particulars	Amount ($)
Sales	1,16,600	(2200 units * 53$ p.u)
Less : VC	90,200	(2200 units * 41$ p.u)
Contribution Margin	26,400
Less : Fixed Cost	20,100
Profit	6,300

Answer 2

22 23 62 Selling Price Less Variable Expenses Contribution Margin Per Unit -41 24 21 Breakeven Point in Units = Fixed Expenses Contribution Margin Per Unit 27300 Breakeven Point in Units = 1300 Units Contribution Margin Ratio Contribution Margin Selling Price 62 Contribution Margin Ratio 33.87%

Breakeven Point in Sales dollars = Fixed expenses Contribution Margin Ratio 27,300 33.87% Breakeven Point in Sales dollars 80600 Benson Company Income Statement Sales Variable Cost Contribution Margin Fixed Cost Net Income 80,600 53,300 27,300 27,300

Breakeven Point in Units = Fixed Expenses +Desired Profit Contribution Margin Per Unit 27300+6300 21 33600 Breakeven Point in Units = 1600 Units Contribution Margin Ratio Contribution Margin Selling Price Contribution Margin Ratio 33.87%

78 Breakeven Point in Sales dollars = Fixed expenses +Desired Profit Contribution Margin Ratio 27300+6300 33.87% 83 84 85 33,600 33.87% Breakeven Point in Sales dollars 99200 Benson Company Income Statement Sales Variable Cost Contribution Margin Fixed Cost Net Income 99,200 65,600 33,600 27,300 6,300