Lindon Company is the exclusive distributor for an automotive product that sells
ID: 2340791 • Letter: L
Question
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.
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 $138,600?
Explanation / Answer
1)variable expenses per unit = price [1-CM ratio]
= 42 [1-.30]
= 29.4 per unit
2)break-even point in unit sales =Fixed cost /unit contribution
= 264600 /12.6
= 21000 units
Breakeven in ($) =Fixed cost /CM ratio
= 264600/.30
= $ 882000
**unit contribuion = 42-29.4= 12.6
3)Unit sales to achieve target profit = [fixed cost+ target profit ]/unit contribution
=[264600+138600[/12.6
= 403200/12.6
= 32000 units
$ sales to achieve to target profit = [fixed cost +target profit ]/CM ratio
=[264600+138600]/.30
=$ 1344000
4)Reduction In variable cost by $ 4.2 ,will increase contribution by 4.2 ,new contribution per unit = 12.6+4.2 = 16.8
CM ratio = contribution /price
= 16.8/42 = .40 or 40%
BEP(unit) = 264600/16.8 = 15750 units
BEP($)= 264600/.40=$ 661500
Target profit ($) = [264600+138600]/.40
= 1008000
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