Problem 3 The following information is available for Lost Trails Sales Price var
ID: 2341704 • Letter: P
Question
Problem 3 The following information is available for Lost Trails Sales Price variable manufacturing costs Commission Fixed Costs 150 85 10% of sales price $200,000 Answer the following 1. What is the contribution margin (CM) per unit? 2. What is the CM ratio? 3. What is the break-even point in units? 4. What is the break-even point in dolllars? 5. What is our income before taxes if we sell 5,000 units? 6. How many units must we sell to earn $90,000 after taxes if the tax rate is 40%? 7. Suppose we are selling 4,800 units. we think that if we lower the sales price by 10% that sales will increase 25% Determine the income under both alternatives. (Now and if we lower price) 8. We can buy a new machine that will reduce variable manufacturing costs by $6 per unit. Fixed costs will increase $90,000. We are currently selling 5,000 units. Should we bjuy the machine at this level? Show why or why not 9. At what level of units would we be indifferent to buying or not (that is income would be the same) 10. We are considering elimianting the commission and paying fixed salaries of an additional $100,000 per year. We are selling10,000 units. Would we be better off to eliminate the commission? Show why or Why notExplanation / Answer
Answer 1.
Selling Price = $150
Variable Cost per unit = Variable Manufacturing Costs + Variable Commission
Variable Cost per unit = $85 + 10% * $150
Variable Cost per unit = $100
Contribution Margin per unit = Selling Price - Variable Cost per unit
Contribution Margin per unit = $150 - $100
Contribution Margin per unit = $50
Answer 2.
Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $50 / $150
Contribution Margin Ratio = 33%
Answer 3.
Breakeven Point in units = Fixed Costs / Contribution Margin per unit
Breakeven Point in units = $200,000 / $50
Breakeven Point in units = 4,000
Answer 4.
Breakeven Point in dollars = Breakeven Point in units * Selling Price
Breakeven Point in dollars = 4,000 * $150
Breakeven Point in dollars = $600,000
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