Breakeven Analysis and Planning Future Sales P9. PeerlessCompanyhasamaximumcapac
ID: 2373126 • Letter: B
Question
Breakeven Analysis and Planning Future Sales
P9. PeerlessCompanyhasamaximumcapacityof500,000unitsperyear.Variable manufacturing costs are $25 per unit. Fixed overhead is $900,000 per year. Vari- able selling and administrative costs are $5 per unit, and fixed selling and adminis- trative costs are $300,000 per year. The current sales price is $36 per unit.
Required
What is the breakeven point in (a) sales units and (b) sales dollars?
How many units must Peerless Company sell to earn a profit of $600,000
per year?
Astrikeatoneofthecompany%u2019smajorsuppliershascausedashortageofmate-
rials, so the current year%u2019s production and sales are limited to 400,000 units. To partially offset the effect of the reduced sales on profit, management is plan- ning to reduce fixed costs to $1,000,000. Variable cost per unit is the same as last year. The company has already sold 30,000 units at the regular selling price of $36 per unit.
a. What amount of fixed costs was covered by the total contribution mar- gin of the first 30,000 units sold?
b. What contribution margin per unit will be needed on the remaining 370,000 units to cover the remaining fixed costs and to earn a profit of $300,000 this year?
Explanation / Answer
variable cost = 25 + 5 = 30 per unit
fixed cost = 900000 + 300000 = 1200000
a) break even slae:
36x= 30x +1200000
6x = 1200000
x= 200000 units
b) sales = 200000 * 36 = 7200000
c)36x-30x-1200000 = 600000
6x = 1800000
x = 300000 units
hence peerless company needed to produce 300000 units to earn profit of 600000
d) fixed cost covered = units * contribution = 30000 * 6 = 180000
e) remaining fixed cost = 1000000 - 180000 = 820000
contribution matgin per unit = (remaining fixed cost + profit desired)/units = (820000 + 300000)/370000 = 3.0227 per unit
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