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 $50.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $345,000 per year. The company plans to sell 27,200 units this year. Required: 1. What are the variable expenses per unit? 2. What is the break-even point in unit sales and in dollar sales? 3. What amount of unit sales and dollar sales is required to attain a target profit of $195,000 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $5.00 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Explanation / Answer

Requirement 1 Variable Cost Per unit = $50X70% $35 per Unit If CM ratio is 30%, Variable Expense Ratio is 70% Requirement 2 Break even in unit sales = Fixed expenses/ contribution per unit Contribution Per unit = $50X30% = $15 per Unit Break even in unit sales = 345,000/15 =23,000 Units Break even in dollar sales = Break even units * selling price per unit =23,000 * 50 =$1,150,000 Requirement 3 Target Profit           1,95,000 Fixed Expenses           3,45,000 Contribution Required           5,40,000 Contribution Per unit 15 Unit Sales (540000/15)               36,000 Dollar Sales (36000X50)         18,00,000 Requirement 4 Sale price per uint 50 Variable Expenses per unit(35-5) 30 Contribution per unit 20 Break even in unit sales = Fixed expenses/ contribution per unit Break even in unit sales = 345,000/20 =17,250 Units Break even in dollar sales = Break even units * selling price per unit =17,250 * 50 =$862,500

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