Harder Company manufactures a product that sells for $50 per unit. Harder incurs

Question

Harder Company manufactures a product that sells for $50 per unit. Harder incurs a variable cost per unit of $35 and $2,400,000 in total fixed costs to produce this product. It is currently selling 200,000 units.

a) Compute and label the contribution margin per unit and contribution margin ratio.

b) Using the contribution margin per unit, compute the break-even point in units.

c)Using the contribution margin ratio, compute the break-even point in dollars.

d) Compute the margin of safety and margin of safety ratio.

e) Compute the number of units that must be sold in order to generate net income of $300,000 using the contribution margin per unit.

f) Should Harder Company give a commission to its salesmen based on 10% of sales, if it will decrease fixed costs by $400,000 and increase sales volume 20%? Support your answer with labeled computations.

Explanation / Answer

Contribution per unit=Sale price-Variable cost

=$50-35

=$15 per unit

Contribution margin ratio=Contribution per unit/sale price

=15/50

=30%

b)Break even point=Fixed cost/Contribution per unit

=2400000/15

=160000 units

c) Break even point($)=Fixed cost/Contribution margin ratio

=2400000/30%

=$8000000

d)Margin of safety=Actual sales-Break even sales

=(50*200000)-8000000

=$2000000

Margin of safety ratio=2000000/10000000

=20%

e)required number of units=Fixed costs+net income/COntribution per unit

=2400000+300000/15

=180000 units

f)Earlier profit=3000000-2400000

=$600000

Revised Sales=10000000*120%

=$12000000

Commission=$1200000

Hence profit=3600000-1200000-2000000

=$400000

hence it should not be done.Present policy should be continued

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