Lindon Company is the exclusive distributor for an automotive product that sells
ID: 2558919 • Letter: L
Question
Lindon Company is the exclusive distributor for an automotive product that sells for $24.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $118,800 per year. The company plans to sell 18,100 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 $46,800 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.40 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
Explanation / Answer
1.
Variable Expense Per Unit = (1- CM Ratio) * Sales Price Per Unit
= 70 % * $ 24
= $ 16.80
Hence the correct answer is $ 16.80
2.
Break Even Point (in Dollars)= Fixed Cost / Contribution Margin Ratio
= $ 118,800 / 30%
= $ 396,000
Break Even Point (in units)= Fixed Cost / Contribution Margin Per Unit
= Fixed Cost / ( $ 24- $16.80)
= $ 118,800 / ( $ 7.2)
= 16,500 Units
3.
Required Contribution = Target Profit + Fixed Cost
= $ 46,800 + $ 118,800
= $ 165,600
Sales Unit Required = Required Contribution / Contribution Margin Per Unit
= $ 165,600/ ( $ 7.20)
= 23,000 Units
Sales Dollar Required = Sales Unit Required * Selling Price Per Unit
= 23,000 * $ 24
= $ 552,000
4.
Sales Price = $ 24
Less: Variable Cost ( $ 16.80- $ 2.40)
= 14.40
Contribution Margin = $ 9.60
Contribution Margin Ratio = Contribution Margin / Sales *100
= $ 9.60 /$ 24 *100
=40%
Break Even Point ( in Dollars)= Fixed Cost / Contribution Margin Ratio
= $ 118,800 / 40%
= $ 297,000
Break Even Point (units)= Fixed Cost / Contribution Margin
= $ 118,800 / ( $ 9.60)
= 12,375 Units
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