Lindon Company is the exclusive distributor for an automotive product that sells
ID: 2472980 • Letter: L
Question
Lindon Company is the exclusive distributor for an automotive product that sells for $19.50 per unit and has a
CM ratio of 30%. The company’s fixed expenses are $101,790 per year. The company plans to sell 12,800 units
this year.
Required:
1.
What are the variable expenses per unit?
2.
Use the equation method:
a.
What is the break-even point in unit sales and in dollar sales?
b.
What amount of unit sales and dollar sales is required to earn an annual profit of $29,250?
c.
Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by
$1.95 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
3.
Repeat (2) above using the formula method.
a.
What is the break-even point in unit sales and in dollar sales?
b.
What amount of unit sales and dollar sales is required to earn an annual profit of $339,300?
c.
Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by
$1.95 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
Lindon Company is the exclusive distributor for an automotive product that sells for $19.50 per unit and has a
CM ratio of 30%. The company’s fixed expenses are $101,790 per year. The company plans to sell 12,800 units
this year.
Explanation / Answer
Variable cost per unit= Sales Price- Contribution
=$19.50- 19.50 x 30=
=$13.65
SpQ = VeQ + Fe
Where;
Sp = Sales price per unit.
Q = Number (quantity) of units to be manufactured and sold during the period.
Ve = Variable expenses to manufacture and sell a single unit of product.
Fe = Total fixed expenses for the period.
2.a)
Let Q be the breakeven point
19.5 x Q= 13.65 x Q + $101,790
19.5 Q – 13.65 Q= $101,790
5.85 Q= $101,790
Q= $101,790/5.85
Q=17,400 units
Sales in Dollar = 19.5 x Q= 19.5 x 17,400 = $ 339,300
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b) Let Q be the sales in units
Breakeven point in Dollar= Q x Sp =17,400 x $19.50=$339,300
Sales in units for target profit of $ 29,250
19.5 x Q= 13.65 x Q + $101,790 + $29,250
19.5 Q – 13.65 Q = $ 131040
5.85 Q = 131040
Q = 131040 / 5.85 = 22,400
Sales in dollar for target profit of $ 29,250
Sales in Dollar = 19.5 x Q= 19.5 x 22,400 = $ 436,800
c) New variable cost = 13.65 - 1.95 = $ 11.7
Let Q be the break even point in units
Break even point in units
SpQ = VeQ + Fe
19.5 x Q= 11.70 x Q + $101,790
19.5 Q – 11.70 Q = $ 101,790
7.8 Q = 101,790
Q = 101790/ 7.8 = 13,050
Break even point in Dollar = 19.5 x 13,050 = $ 254,475
3.a) Contribution per unit = Selling price – variable cost
= 19.5 – 13.65 = $ 5.85
Breakeven point in units = Fixed cost /Contribution per unit
= 101,790/5.85 = 17,400
Breakeven point in $ = Fixed cost/Contribution Margin %
=101,790/ 30% = $ 339,300
b) Target sales in units= Target profit +fixed cost / Contribution per unit
= 29,250 + 101,790 /5.85 = 22,400 units
Target sales in $ = Fixed cost + Target profit /Contribution margin %
= 101,790 + 290,250 /30 % = $ 436,800
c) New variable cost = 13.65 – 1.95 = 11.70
New contribution per unit = Selling price – new variable cost
= 19.5 – 11.70 = $ 7.8
Contribution margin % = 7.8/19.5 x100 = 40 %
Breakeven point in unit = Fixed cost/ Contribution per unit = 101,790/7.8 = 13,050 units
Breakeven point in $ = Fixed cost/ Contribution margin % = 101,790/40% = $ 254,475
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