Question

Lindon Company is the exclusive distributor for an automotive product that sells for $34.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $193,800 per year. The company plans to sell 21,600 units this year. 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 $91,800 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.40 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 $91,800?

Answer 1

1. $23.80

2. Break even Point (units) = 19,000 units and Break even Point (dollars) = $646,000

3. Unit sales to attain a target profit = 28,000 units and Dollar sales to attain a target profit = $952,000

4. Break even Point (units) = 28,500 units, Break even Point (dollars) = $969,000 and Dollar sales to attain a target profit = $1,428,000.

Step-by-step explanation:

Variable Cost % = 100% - 30%

= 70%

Thus, variable expenses per unit = $34.00 × 70%

= $23.80

Break even Point is the level of activity where a firm makes neither a profit nor a loss.

Break even Point (units) = Fixed Cost / Contribution per unit

= $193,800 / ($34.00 ×30%)

= $193,800 / $10.20

= 19,000 units

Break even Point (dollars) = Fixed Cost / CM Ratio

= $193,800 / 0.30

= $646,000

Unit sales to attain a target profit = (Fixed Cost + Target Profit) / Contribution per unit

= ($193,800 + $91,800) / $10.20

= 28,000

Dollar sales to attain a target profit = (Fixed Cost + Target Profit) / CM Ratio

= ($193,800 + $91,800) / 0.30

= $952,000

When variable expenses reduce by $3.40 per unit.

Break even Point (units) = Fixed Cost / Contribution per unit

= $193,800 / ($34.00 - $23.80 - $3.40 )

= $193,800 / $6.80

= 28,500 units

Break even Point (dollars) = Fixed Cost / CM Ratio

= $193,800 / ($6.80/ $34.00)

= $969,000

Dollar sales to attain a target profit = (Fixed Cost + Target Profit) / CM Ratio

= ($193,800 + $91,800) / 0.20

= $1,428,000