Question

LINDON COMPANY IS THE EXCLUSIVE DESTRIBUTOR FOR AN AUTOMOTIVE PRODUCT THAT SELLS FOR $40 PER UNIT AND HAS A CM RATIO OF 30%, THE COMPANY’S FIXED EXPENSES ARE $180000 PER YEAR. THE COMPANY PLANS TO SELL $16000 UNITS THIS YEAR.

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 BREAKEVEN POINT IN UNIT SALES AND DOLLAR SALES? WHAT DOLLAR SALES IS REQUIRED TO ATTAIN A TARGET PROFIT OF $60,000.

Answer 1

The calculation is shown below:

New BEP in units = Fixed expense/Contrubuyion per unit

Contribution per unit = $40 * 30% = $12

Reduction in variable cost will increase contribution margin by $4 per unit.

BEP in units = $180,000/($12+$4) = 11,250 units

BEP in dollars = ($180,000/$16) * $40 = $450,000

Dollars sales at target profit (before) = ($180,000 + $60,000)/30%

= $800,000

Dollar sales at target profit (after) = [($180,000 + $60,000)/$16] * 40

= $600,000