Question

Exercise 5-14 Break-Even and Target Profit Analysis (LO5-3, LO5-4, LO5-5, LO5-6) 12.5 points 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. 8 04:00 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 $138600? eBook 1. Variable expense per unit 2 Break even point in units Break-even point in dollar sales 3. Unit sales needed to attain to profit Dollar sales needed to attain target profit 4. New break-even point in unit sales New break even point in dolar sales Dollar salos needed to attain target profit

Answer 1

Answer:

Here, CM ratio is Contribution Margin ratio i.e., 30%

Selling Price per unit is $42

Total fixed expenses are $264,600

1. Calculation of variable cost per unit

Contribution Margin ratio = [(Sale Price per unit - Variable cost per unit) / Sale Price per unit ]

                   30%     = [($42 - Variable cost per unit) /$42]

               0.3 * $42     = $42 - Variable cost per unit

                  $12.6      = $42 - Variable cost per unit

   Variable cost per unit = $42 - $12.6 = $29.4 per unit

2. Break-even Sales

Break-even Sales (Units) = Fixed Cost / Contribution margin per unit

Here, Contribution margin per unit = Sale Price per unit - Variable cost per unit = $42 - $29.4 = $12.6 per unit

Break-even Sales (Units) = Fixed Cost / Contribution margin per unit

                                    = $264,600 / $12.6

                                    = 21,000 units

Break-even Sales (Dollars) = Fixed Cost / Contribution margin ratio

                                        = $264,600 / 30%

                                        = $882,000

3. Target profit of $138,600

Units to be sold to attain targeted profit of $138,600 = [(Fixed cost + Targeted Profit) / Contribution margin per unit]

                                                                           = [($264,600 + $138,600) / $12.6]

                                                                           = $403,200 / $12.6

                                                                           = 32,000 units

Sales (Dollars) to attain targeted profit of $138,600 = [(Fixed cost + Targeted Profit) / Contribution margin ratio]

                                                                          = [($264,600 + $138,600) / 30%]

                                                                          = $403,200 / 30%

                                                                          = $1,344,000

4. If variable cost is reduced by $4.2 per unit

Earlier Variable cost per unit = $29.4

Revised Variable cost per unit = $29.4 - $4.2 = $25.2 per unit

Revised Contribution margin per unit = Sale Price per unit - Variable cost per unit = $42 - $25.2 = $16.8 per unit

Revised Contribution margin ratio = [(Contribution margin per unit) / Sale price per unit] * 100

                                                 = ($16.8 / $42) * 100

                                                 = 0.4 or 40%

Break-even Sales (Units) = Fixed Cost / Contribution margin per unit

                                     = $264,600 / $16.8

                                     = 15,750 units

Break-even Sales (Dollars) = Fixed Cost / Contribution margin ratio

                                       = $264,600 / 40%

                                        = $661,500

Units to be sold to attain targeted profit of $138,600 = [(Fixed cost + Targeted Profit) / Contribution margin per unit]

                                                                           = [($264,600 + $138,600) / $16.8]

                                                                           = $403,200 / $16.8

                                                                           = 24,000 units

Sales (Dollars) to attain targeted profit of $138,600 = [(Fixed cost + Targeted Profit) / Contribution margin ratio]

                                                                          = [($264,600 + $138,600) / 40%]

                                                                          = $403,200 / 40%

                                                                          = $1,008,000

1	Variable Expense per unit	$29.4
2	Break-even Point in units	21,000
	Break-even Point in dollar sales	$882,000
3	Unit Sales needed to attain target profit	32,000
	Dollar Sales needed to attain target profit	$1,344,000
4	New break-even point in unit sales	15,750
	New break-even point in dollar sales	$661,500
	Dollar Sales needed to attain target profit	$1,008,000