Baker Company has a product that sells for $20 per unit. The variable expenses a

Question

Baker Company has a product that sells for $20 per unit. The variable expenses are $12 per unit, and fixed expenses total $30,000 per year.

Required:
a. What is the total contribution margin at the break-even point?
b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how much would net operating income be expected to increase?
d. The marketing manager wants to increase advertising by $6,000 per year. How many additional units would have to be sold to increase overall net operating income by $2,000?

Explanation / Answer

a) Total CM at Breakeven point = Fixed Expenses = $30,000 BreakEven Units=FC/UnitCostCM = 30,000/8 = 3750units 3,750units x 8 = $30,000(CM $$$) b)CM ratio= CM/SP $8/$20 = .40 CM = SP-VC = 20 - 12 = 8 c) Total sales increased to 20,000 therefore sales would be $95,000 ( $20 X 3750) CM will be $95000 X .40 = $38,000 CM - FC = net Oper Inc = $38,000 - $30,000 = $8,000 d) x = FC + 6,000 + 2,000/CM ratio x = (30,000 + $6,000 + $2,000)/.40 x = $95,000 $95000/$20 = 4,750 4,750 - 3,750 = 1,000 increase in additional units

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