Question

EXERCISE 6-14 Break-Even and Target Profit Analysis LO6-3, LO6-4, LO6-5, LO6-6 Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30 % . The company's fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year. Required: 1. What are the variable expenses per unit? 2. What is the break-even point in unit sales and in dollar sales? What amount of unit sales and dollar sales is required to attain a target profit of $60,000 per year? 4. 3. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 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 S$60,000?

Answer 1

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1) Variable expenses per unit Sales price per unit Contribution margin ratio Contribution margin per unit (40 x 30 %) 40 30% $ Sales price per unit CM per unit $40- $12 12 Variable expense per unit $ 28 Variable expense per unit 28 2) Break-even point Fixed expenses/ CM per unit $180,000 $12 Break even point In unit sales 15,000 Break even point In unit sales 15,000 Break even unit x Sales price per unit Break even in dollar sales 15,000 x $ 40 $ 600,000 Break even in dollar sales 600,000

3) Target unit sales and amount (Fixed expense + Target profit)/ CM per unit (180,000 60,000)/ $12 Target unit sales 20,000 Units sales required 20,000 Dollar sales required Unit sales required x Sales price per unit 20,000 x$ 40 $ 800,000 Dollar sales required $ 800,000

4) Sales price per unit Less: Variable expense per unit (28-4) 40 24 $ Contribution Margin per unit 16 Fixed expenses /CM per unit Break even point In unit sales $180,000/$16 11,250 Break even point In unit sales 11,250 Break even unit x Sales price per unit 11,250 x $ 40 $ Break even in dollar sales 450,000 Break even in dollar sales 450,000 Target unit sales (Fixed expense +Target profit)/CM per unit (180,000 60,000)/$16 15,000 Units sales required 15,000 Dollar sales required Unit sales required x Sales price per unit 15,000 x $40 $ 600,000 Dollar sales required 600,000