Super Sales Company is the exclusive distributor for a high-quality knapsack. Th

Question

Super Sales Company is the exclusive distributor for a high-quality knapsack. The product sells for $90 per unit and has a CM ratio of 20%. The company’s fixed expenses are $540,000 per year. The company plans to sell 34,000 knapsacks this year.

Required: 1. What are the variable expenses per unit?

What is the break-even point in units and in sales dollars?

What sales level in units and in sales dollars is required to earn an annual profit of $117,000?

What sales level in units is required to earn an annual after-tax profit of $117,000 if the tax rate is 20%?

Assume that through negotiation with the manufacturer, Super Sales Company is able to reduce its variable expenses by $9 per unit. What is the company’s new break-even point in units and in sales dollars? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

Use the equation method for the following:

Explanation / Answer

Solution.

1. Variable expenses per unit.

A. What is the break-even point in units and in sales dollars?

px = vx + FC + Profit

BEP in sales Doller = (34,000 x 72) + 540,000 = $2,988,000.

BEP in sales Unit = $2,988,000 / 90 = 33,200 unit.

B. Sales level in units and in sales dollars is required to earn an annual profit of $117,000.

BEP in sales Doller = (34,000 x 72) + 540,000 + 117,000 = $3,105,000.

BEP in sales Unit = $3,105,000 / 90 = 34,500 unit.

C. Sales level in units is required to earn an annual after-tax profit of $117,000 if the tax rate is 20%?

If after tax required profit = 117,000

Before tax profit   = 117,000 / 80% = 146,250

BEP in sales Doller = (34,000 x 72) + 540,000 + 146,250 = $3,134,250.

BEP in sales Unit = $3,134,250 / 90 = 34,850 unit.

D. Company’s new break-even point in units and in sales dollars after change in variable cost.

BEP in sales Doller = (34,000 x 63) + 540,000 = $2,142,000.

BEP in sales Unit = $2,142,000 / 90 = 23,800 unit.

Formula method.

1. Variable expenses per unit.

Contribution margin is 20%

So Variable cost per unit = $90 x 80% = $72

A. What is the break-even point in units and in sales dollars?

BEP in sales Doller = 540,000 / 20% = $2,988,000.

BEP in sales Unit = $2,988,000 / 90 = 33,200 unit.

B. Sales level in units and in sales dollars is required to earn an annual profit of $117,000.

BEP in sales Doller = ( 540,000 + 117,000) / 20% = $3,285,000.

BEP in sales Unit = $3,285,000 / 90 = 36,500 unit.

C. Sales level in units is required to earn an annual after-tax profit of $117,000 if the tax rate is 20%.

If after tax required profit = 117,000.

Formula = (FC + PAT /(1 - T )) CM

= (( 540,000 + 117,000 / 80%)) / 20%

= 686,250 / 20% = $3,431,250

Unit = $3,431,250 / $90 = 38,125 Unit.

D. Company’s new break-even point in units and in sales dollars after change in variable cost.

Sales price = $90

Variable cost = $63

Contribution margin = $27

CM ratio = $27 / $90 = 30%.

BEP in sales Doller = 540,000 / 30% = $1,800,000.

BEP in sales Unit = $1,800,000. / 90 = 20,000 unit.

Particular Amount Sales              90.00 Variable Cost              72.00 Contribution margin              18.00

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