1. The controller of the Anderson Company is preparing data for a conference con

Question

1. The controller of the Anderson Company is preparing data for a conference concerning certain independent aspects of its operations.

Required:

a. Total fixed costs are $500,000 and a unit of product is sold for $4 in excess of its unit variable cost. What is break-even unit sales volume?

b. The company will sell 60,000 units of product--each having a unit variable cost of $9--at a price that will enable the product to absorb $240,000 of fixed costs. What minimum unit sales price must be charged to break even?

c. Net income before taxes of $120,000 is desired after covering $600,000 of fixed costs. What minimum contribution margin ratio must be maintained if total sales revenue is to be $1,800,000?

Explanation / Answer

Always remember in this type of question always use the following table: $ Sales x Less: VC y Contribution X-Y Less: FC Z Profit X-Y-Z Now in each three of this case we solve question using this table: a) FC $500,000 Sales per unit in excess of $4 if VC is $1 SO Sales per unit is $ (4+1)which is 5 $ VC per unit is $ 1 Now let total no. of units is X $ (in $) Sales 5x Less: VC 1x Contribution 4x Less: FC 500000 Profit 4x-500000 Now we know at Break even point profit is 0 SO, 4x-500000 = 0 4x = 500000 x = 500000/4 X = 125000 Break even units volume is 125000 units b) again first drow the same table: Units 60000 VC 9 FC $240,000 Let selling price per unit is $x $ (in $) Sales 60000x Less: VC 540000 (9*60000) Contribution 60000x-540000 Less: FC 240000 Profit 60000x-540000-240000 Now we know at Break even point profit is 0 SO, Profit = 0 60000x- $ 780000 = 0 60000x = $780,000 x = 780000/60000 x = 13 minimum unit sales price must be charged to break even = $ 13 c) Profit = $120,000 FC = $600,000 Sales = $1,800,000 again use the same table: Let VC $x $ (in $) Sales 1800000 Less: VC x Contribution 1800000-x Less: FC 600000 Profit 1800000-x-600000 Actual profit given is $ 120000 so, 1800000-x-600000 = 120000 1200000-x = 120000 1200000-120000 = x x = 1080000 $ So, contribution = 720000 P/v Ratio = Contribution/Sales = 720000/1800000 = 40 minimum contribution margin ratio = 40percent

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