Lindon Company is the exclusive distributor for an automotive product that sells

Question

Lindon Company is the exclusive distributor for an automotive product that sells for $48.00 per unit and has a CM ratio of 36%. The company's fixed expenses are $362,880 per year. The company plans to sell 22,000 units this year. Required 1. What are the variable expenses per unit? (Round your answer to 2 decimal places.) Variable expenses per unit 2. Use the equation method: a. What is the break-even point in unit sales and in dollar sales? (Do not round intermediate calculations.) Break-even point in unit sales Break-even point in dollar sales b. What amount of unit sales and dollar sales is required to earn an annual profit of $86,400? (Do not round intermediate calculations.) Sales level in units Sales level in dollars

Explanation / Answer

1. If the contribution margin ratio is 36%, variable cost ratio is (1-36%) or 64%

Therefore variable cost per unit = $ 48 x 64% = $ 30.72

2. a.Break-even point in unit sales = Fixed cost / Unit contribution margin = 362,880 / 17.28 = 21,000 units

Break-even point in dollar sales = Fixed cost / CM ratio = 362,880 / 36% = $ 1,008,000

b. Sales level required to earn profit of $ 86,400 = (Fixed cost + Target profit) / Unit contribution margin = 449,280 / 17.28 = 26,000 units

Dollar sales required to earn a profit of $ 86,400 =( Fixed cost + Target profit) / Contribution margin ratio = 449,280 / 36% = $ 1,248,000

c. New variable expenses = 30.72 - 5.10 = $ 25.62

Therefore contribution margin per unit = 48 - 25.62 = $ 22.38 or 46.625%

Break-even point in units = 362,880 / 22.38 = 16,215 units

Break-even point in dollar sales = 362,880 / 46.625% = $ 778,295

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