The fixed cost of producing a certain produet is $200,000; the variable cost per

Question

The fixed cost of producing a certain produet is $200,000; the variable cost per unit is S10; and the price is S20 per unit. All firms in the industry are currently selling 1,200,000 units per year. The firm is eurren units per year. Find the following (show all calculations): (40 points) III. tly selling 500,000 a. The contribution per unit (5 points) b. The contribution margin (5 points) c. Breakeven in units (5 points) d. Breakeven in dollars (5 points) e. The breakeven market share (10 points) The change in unit sales necessary to maintain the level of total contribution dollars if the price ofthe product is reduced by 25%. (10 points). f.

Explanation / Answer

F = Fixed cost

V = Variable cost per unit

S = Unit revenue = selling price per unit

Let Q = Production Volume

a.

Contribution per unit = Selling price per unit – Variable cost per unit

C = S – V

b.

Contribution Margin = Sales Revenue – Total variable cost = (S x Q) – (V x Q) = (S – V) x Q

Contribution Margin = C x Q

c.

Breakeven Units = Fixed Cost/Contribution per unit = F/(S – V)

D.

Breakeven in Dollars = Fixed cost/Contribution margin ratio

Contribution margin ratio = Contribution margin per unit/Sales price per unit = C/S

E.

Breakeven Market Share = Breakeven volume/Market sales volume

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