Question

Alem Company is the exclusive distributor for a new product. The product sales for Birr 100 per unit and has a contribution margin ratio of 30%. The company’s fixed expenses are Birr 300 per year.

Required:
A. what are the variable expenses per unit?
B. Using the equitation method
I. What are the break-even points in units and sales Birrs?
II. What sales a level in units and sales birrs is required to earn an annual Profit of birr
90,000?
III. Assume that through negotiation with the manufacturer the company is able to reduce
Its variable expenses by Birr 10 per unit. What is the company’s breakeven point in
Units and in sales Birrs?
C. Repeat (B) above using the contribution margin Method?

Answer 1

Step-by-step explanation:

A. The variable expenses per unit can be calculated using the contribution margin ratio. The contribution margin ratio is the percentage of each unit's sales price that contributes to covering the fixed expenses and generating profit. In this case, the contribution margin ratio is 30%. To find the variable expenses per unit, we can subtract the contribution margin ratio from 100%. Variable expenses per unit = 100% - Contribution margin ratio B. I. To calculate the break-even point in units, we need to determine the number of units that need to be sold in order to cover the fixed expenses. Break-even point in units = Fixed expenses / Contribution margin per unit To calculate the break-even point in sales Birrs, we can multiply the break-even point in units by the sales price per unit. Break-even point in sales Birrs = Break-even point in units * Sales price per unit II. To determine the sales level in units and sales Birrs required to earn an annual profit of Birr 90,000, we need to consider the fixed expenses, the desired profit, and the contribution margin ratio. Let's assume the desired profit is X. Profit = (Sales in units * Contribution margin per unit) - Fixed expenses We can rearrange this equation to solve for the sales in units: Sales in units = (Fixed expenses + Desired profit) / Contribution margin per unit To find the sales in Birrs, we multiply the sales in units by the sales price per unit. Sales in Birrs = Sales in units * Sales price per unit III. If the company is able to reduce its variable expenses by Birr 10 per unit, we need to recalculate the break-even point in units and sales Birrs using the updated variable expenses per unit. C. Repeat (B) above using the contribution margin method means using the contribution margin ratio to calculate the break-even point and sales level required to earn a specific profit. The steps and formulas will be similar to those in part B, but instead of using the contribution margin per unit, we will use the contribution margin ratio