Bill’s Cabinets sells a product for $360 per unit. The company’s variable cost p
ID: 2434891 • Letter: B
Question
Bill’s Cabinets sells a product for $360 per unit. The company’s variable cost per unit is $60 for direct material, $50 per unit for direct labor, and $34 per unit for overhead. Annual fixed production overhead is $74,800, and fixed selling and administrative overhead is $50,480.a. What is the contribution margin per unit?
b. What is the contribution margin ratio?
c. What is the break-even point in units?
d. If Bill’s Cabinets wants to earn a pre-tax profit of $51,840, how many units must the company sell?
Explanation / Answer
a) The contribution margin per unit is calculted as Contribution margin per unit = Selling price per unit - Variable cost per unit = $360 - $144 = $216 The variable cost is determined as $50 + $60 + $34 = $144 b) Contribution margin ratio = Contribution margin per unit / Selling price per unit = $216 / $360 = 0.6 c) Break even point in units = Fixed costs / Contribution margin per unit = $125,280 / $144 = 870 units d) Dollar sales volume to be attained is computed as Sales volume = (Fixed expenses + target profit) / Contribution margin ratio = ($125,280 + $51,840 ) / 0.6 = $177,120 / 0.6 = 295,200 units Therefore, to earn a profit of $51,840 the company must sell 295,200 units.
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