Exercise 5-14 Break-Even and Target Profit Analysis [LO5-3, LO5-4, LO5-5, LO5-6]

Question

Exercise 5-14 Break-Even and Target Profit Analysis [LO5-3, LO5-4, LO5-5, LO5-6]

Lindon Company is the exclusive distributor for an automotive product that sells for $28.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $147,000 per year. The company plans to sell 19,500 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 $63,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.80 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Explanation / Answer

1 Variable expenses per unit = 28*(1-30%)= $19.6 2 Break-even point in unit sales = Fixed costs/Unit contribution margin = 147000/(28-19.6)= 17500 Break even point in dollar sales = Fixed expenses/CM ratio = 147000/30%= $490000 3 Amount of unit sales = (147000+63000)/(28-19.6)= 25000 units Amount of dollar sales = (147000+63000)/30%= $700000 4 Revised variable cost = 19.6-2.8= $16.8 New break-even point in unit sales = 147000/(28-16.8)= 13125 New break-even point in dollar sales = 13125*28= $367500

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